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❚ Organizational Culture ❚ Compensation ❚ Performance & Recognition

❚ Business Strategy ❚ Benefits ❚ Development & Career Opportunities

❚ Human Resource Strategy ❚ Work-Life

Journal

Content

Key

Executive SummariesSecond Quarter 2008 | Volume 17 | Number 2

Human Resource Management Strategies: Can We Discover

What Will Work Through Benchmarking?

Robert J. Greene, Ph.D., CCP, CBP, GRP, SPHR, GPHR I Reward $ystems Inc.

HR practitioners spend a great deal of energy seeking approaches that have been

successful in other organizations. This process, typically called “benchmarking,” is wide-

spread. This paper discusses: How valuable is benchmarking when it is used for HR

strategies and programs? What form should it take? What processes are most likely to

make it useful?

Workforce Retention and Pay and Reward Practices

in America’s Best Hospitals

Patricia K. Zingheim, Ph.D. I Schuster-Zingheim & Associates Inc.

Jay R. Schuster, Ph.D. I Schuster-Zingheim & Associates Inc.

This study examines the retention strategies and pay and rewards practices of a sample

of the best-performing medical centers and hospitals in the United States. Twenty-one

organizations ranked by U.S. News & World Report participated. A structured interview

with an open-ended questionnaire was used to gather information from these organiza-

tions from CEOs, major operating executives and heads of human resources.

The Role of Line Managers and HR in Reward Program Effectiveness

Tom McMullen I Hay Group

Mel Stark I Hay Group

This paper explores reward program effectiveness and the key role that line managers

play in this regard. New research data suggest that organizations are not effectively

utilizing their line managers in this regard. The HR function must also find better ways to

leverage the manager’s role and better define the role the manager could play in helping

make rewards programs successful.

06

16

30

877/951-9191www.worldatwork.org

Contents © WorldatWork 2008. WorldatWork members and educational institutions may print 1 to 24 copies of any WorldatWork-published article for personal, non-commercial, one-time use only. To order 25 or more print presentation-ready copies, or an electronic copy for distribution to colleagues, clients or customers, contact Gail Hallman, [email protected] at Sheridan Press, 717-632-3535, ext. 8175. To order full copies of WorldatWork publications, contact WorldatWork Customer Relationship Services, [email protected], 877-951-9191.

Second Quarter 2008

5

Also

on the

Inside

Second Quarter | 2008

85 Published Research in Total Rewards

88 Facts & Figures

Lessons from the Office: The Organizational Implementation

of Work-Life Policies

Melanie A. Hulbert, Ph.D. I George Fox University

This paper explores factors possibly influencing organizational decision makers to imple-

ment work-life policies by examining the institutional and cultural environments in which

they exist and includes an examination of how such policies become practices and an

examination of the link between implementation and organizational culture.

The Medicare Prescription Drug Plan: A Model of Complexity

and Ineffective Communication

Frank Giancola

This paper examines Medicare’s Prescription Drug Plan’s basic provisions, the number and

types of drug plans being offered, and enrollment tools to provide an in-depth look at the

issues that challenge seniors and provide valuable lessons for benefits professionals.

What Pay For Performance Should Measure

Bruce Ellig

“Pay-for-performance” is the mantra being chanted from the board of directors down to

the first-line supervisor. But what is the definition of “pay”? Whose performance? What

is the definition of “performance?” And how will it be measured? The pay planner must

answer these questions when creating a pay-for-performance process (not a program).

Programs have limited lives; processes continue until changed.

Health Savings Accounts: Their Purpose in a Company Setting

Zuzana M. Micko I University of Minnesota

This paper explains the history of HSAs as well as the basic characteristics of these

plans. It also examines the challenges companies face as they introduce these plans to

their workers.

44

55

64

76

Robert J. Greene, Ph.D.,

CCP, CBP, GRP, SPHR, GPHR

Reward $ystems Inc.

How effectively an organization manages its human

resources has a major influence on its success.

It is therefore prudent for an organization to find

the best way to attract, retain and manage its workforce in

a manner that maximizes effectiveness. The HR strategies

and programs adopted will, to a large extent, determine

workforce effectiveness. But there are no universally effec-

tive HR strategies and programs. What works is what fits

the unique context of each organization.

Determining the strategies and programs that will best

fit an organization is a critical responsibility of executive

management, supported by HR. And since “good fit” is a

critical predictor of the effectiveness of HR strategies and

programs, they must be derived from the organizational

context, as illustrated in Figure 1.

Determining good fit to context begins by defining

the context. What the organization wishes to accomplish

(vision/mission), the culture that prevails, the internal and

external realities it faces, and the strategy and struc-

ture it adopts will define the context the human-resource

strategy must function within. Even though each organiza-

tion’s context is, to some extent, unique the HR strategies

Human Resource Management

Strategies: Can We Discover

What Will Work Through

Benchmarking?

❚ Human Resource Strategy

Second Quarter 2008



7 Second Quarter | 2008

and programs constituting a good fit

are not likely to be totally unlike what

other organizations design and imple-

ment. In fact, a great deal of energy

is spent by HR practitioners seeking

approaches that have apparently

been successful in other organiza-

tions. This process, typically called

“benchmarking,” is widespread, but

it is criticized by some as overused

or misused. How, the critics of bench-

marking ask, can an organization

assume that a strategy or program that

succeeded in another context will be

successful in its context when the two

contexts almost certainly differ?

It is prudent to know what other

organizations are doing. They repre-

sent the competition for people, and if an organization ignores what competitors

offer, it is in danger of being bested in attracting and retaining critical skills.

On the other hand, deciding whether to be like or unlike competitors is a difficult

task. The HR literature seems to showcase one strategy/program after another,

giving the impression that practitioners are chasing fads or desperately fishing

for something that might work. It is believable that the dramatic changes in the

business environment commonly occurring necessitate revisions to HR strategies

and programs. But it seems unlikely that what was the panacea last year is out

of fashion this year, replaced by something dramatically different (the panacea

this year). Insanity has been defined as “doing the same things over and over

and expecting different results.” But another variation might be “doing the same

things as other (unlike) organizations and expecting the results to be the same in

your organization.”

So what is benchmarking specifically? How valuable is benchmarking when

it is used for HR strategies and programs? What form should it take? What

processes are most likely to make it useful? Benchmarking is generally defined

as a process used by organizations to evaluate various aspects of their processes

in relation to best/common practice. It can assist organizations in thinking about

how they might adopt best/common practices, usually with the aim of increasing

some aspect of performance. But how can an HR practitioner determine if what

seemed to work in another organization would work well in his/her organization?

A model—such as the one in Figure 2 on page 8—can be a framework within

which transportability might be analyzed.

FIGURE 1 Deriving HR Strategy From

Organization Context

Vision/Mission

Culture

Strategy

Structure

Internal

Realities

External

Realities

HR Strategy

❚ Staffing

❚ Development

❚ Performance

Management

❚ Rewards

Management

8 WorldatWork Journal

CONTEXTUAL COMPARISON

The respective contexts ought to be

a major determinant in deciding how

like or unlike two organizations are.

Contextual similarity might make

transporting strategies/programs

across organizations less risky, while

significant dissimilarities raise the risk

level. Much has been written about

the impact of organizational and

workforce culture on HR strategy/

program effectiveness and substantial evidence in the research indicates that cultural

differences must be taken seriously when projecting probable fit to the importing

organization (Trompenaars 2007). Daimler probably wishes it had paid more atten-

tion to cultural considerations when acquiring Chrysler.

Strategy must also be carefully considered. Treacy and Wiersema (1997) formu-

lated a three-strategy model suggesting organizations compete based on operational

excellence, product leadership or customer intimacy. Using this model, the strategies

of Wal-Mart, Costco and Nordstrom can be compared. Placing these organizations

on a continuum from “Operational Excellence” to “Customer Intimacy,” they might

position as seen in Figure 3 on page 9.

Although Wal-Mart and Costco on the surface appear to be low-cost, warehouse

retailers, they have significantly different HR strategies (Casco 2006). Costco pays

more than Wal-Mart, hires more full-time employees and provides benefits to a

much larger percentage of its employees. Although their retail outlets look physically

similar, the average income level of Costco customers is much higher than Wal-Mart

customers, and the mix of merchandise is tailored to meet the customer mix.

Wal-Mart is criticized by society at large for its practices. The CEO of Costco is

also criticized, but by Wall Street analysts, for spending more than is necessary on

employees and lowering profits unnecessarily. The Costco CEO defends the HR

strategy by noting that their turnover costs are much lower and that better trained

and more experienced employees pay off in the long run. This comparison is not

about who is closer to right—both organizations are successful and are using HR

strategies that are consistent with their business strategy. And so is Nordstrom, which

carries much higher cost merchandise and deals with customer expectations that

are different than those faced by Wal-Mart and Costco. These dramatic differences

among three organizations in the same industry (albeit operating in different niches)

illustrate how difficult it might be for Wal-Mart to copy an employee-incentive plan

successfully used by Nordstrom, or even by Costco.

Benchmarking the results of HR strategies/programs has become commonplace,

pioneered by the Saratoga Institute and industry associations. For example, an

organization can compare its turnover to other organizations by using surveys that

FIGURE 2 Benchmarking HR Strategies

Contextual

Comparison

?

Conceptual

Foundation

Our

OrganizationCompetitors


include that measure. If the survey database allows for the user to select subsamples,

it is possible to compare to others in the same industry, of the same size, in the same

area, for the same occupational groups, etc. This informs an organization about how

it compares to its competitor for people. It does not, however, provide direct insight

into the cause of turnover in other organizations, only the amount.

Benchmarking usually consists of comparisons to other organizations. This over-

looks the fact that learning can occur by comparing internally across the parts

of an organization in the quest for strategies that might be effective. The CEO of

Hewlett-Packard once despaired, “If only HP knew what HP knows.” For example,

a multi-divisional organization may be contemplating revisions to the HR strategy/

programs used by a division that is transitioning from a product leadership strategy

to an operational excellence strategy. This kind of evolution becomes necessary

when competitors turn once innovative and unique products into commodities,

forcing the organization to compete based on price and efficiency rather than

uniqueness. The subject organization may be able to benchmark internally against

other divisions already employing an operational effectiveness strategy. This may

reduce some contextual variation, due to common characteristics across the corpora-

tion. It may also be easier to obtain detailed information on things such as incentive

programs and experience with them, since managers may be more motivated to

share with peers if executive management tells them to. For example, when Jack

Welch was CEO of General Electric, he made it clear those who shared talent would

be rewarded, while hoarders would not be rewarded.

Another characteristic of HR programs that should be considered…they are inter-

dependent, and each will influence other HR programs. For example, recruiting new

graduates who must be trained, rather than “job ready” people, may reduce the average

pay rates, may also increase the investment required in development. As a result, bench-

marking average hiring rates separately may give one answer, but if training expenses

are bundled into the comparison, the results may be entirely different.

Some HR functions or processes lend themselves better to benchmarking than

others. Compensation practitioners rely heavily on surveys to determine pay levels

prevailing in specific labor markets. This information is quantitative, it can be obtained

rather easily, and there is an accepted methodology for using surveys. Surveys are

often industry-focused. But surveys that cross industries are also plentiful, most often

used for occupations that easily cross industries, such as HR or IT. If Wal-Mart, Costco

and Nordstrom are competing in the same labor markets for merchandise stockers,

FIGURE 3 A Contextual Comparison of Wal-Mart, Costco and Nordstrom

Operational Excellence Customer Intimacy

Wal-Mart Costco Nordstrom


they should attempt to determine what the pay levels prevailing in the local areas

are for these jobs, using pay survey data. Once they know the “average,” each can

adopt a competitive posture fitting the desired type of employee.

Surveys also typically provide data broken by total compensation elements (base

pay, cash incentives, etc.) as well, providing information on “how” as well as the

“how much.” But when an organization wants to design a new compensation

program and seeks “best design practices” information, the process becomes more

difficult. A survey may indicate that competitors paid the average sales representa-

tives $70,000 last year, with much of that coming in the form of commission. Even

if the survey breaks out base pay from commission, all that the user knows is “how

much.” There is almost never specific information on how much revenue and the

type of revenue that was generated to earn that much commission. And rarely can a

survey user tell if the actual earnings were the result of a typical, good or bad year

for the participating organizations. So when designing a sales-compensation plan,

surveys are of some value, but they do not provide information on design features

and which features will fit the sales context existing within the organization.

Although pay programs may seem to be “benchmarkable,” this can be deceiving.

Lincoln Electric has been heralded as an organization that continued to thrive in an

industry that has largely been taken by foreign competitors. Its famous pay programs

(piecework-driven base pay, supplemented by a companywide gainsharing plan)

have been given much of the credit for its world-class productivity. But this orga-

nization found its methods of compensating employees to be unacceptable and/or

ineffective in parts of Europe and Asia. Instead of altering its culture, it withdrew

from those markets, much wiser about cross-cultural differences.

The author worked with an insurance company located in the Southeastern U.S.

that was determined to acquire a competitor. On paper, the “merger” (it was an acqui-

sition but called a merger out of politeness to the owner/founder) was a marriage

made in Heaven. Complementary market, product and customer characteristics made

this action look like a certain success. But when the process was under way, it was

found that some of them did not mesh. The acquirer had a culture that encouraged

lean staffing and high-quality employees who were highly productive and rewarded

using performance-based incentive plans. The company to be acquired was run like

a family, overstaffed, underpaid and with low performance standards. The differ-

ences in the pay levels had been identified as the new pay structure was developed,

but it is always difficult to identify overstaffing, particularly when low pay makes

employee-compensation expense seem reasonable (more, lower-paid people can

easily cost the same as fewer, highly paid people). Most cost savings in acquisitions

and mergers are expected to be realized by combining redundancies. In this case,

the workforces were like oil and water and did not lend themselves to blending.

The lesson is that benchmarking can play a critical role in M&A activities but requires

considerable investment early in the due diligence process and requires in-depth

examinations that may be difficult to conduct.


Attempting to benchmark strategies and programs in staffing, development and

performance management is a much more challenging activity than gathering data

on prevailing compensation levels. For example, the culture prevailing in an organ-

ization will profoundly affect the type of employee desired, as will the business

strategy. The success of a performance appraisal program will be affected by the

cultural compatibility of the criteria defining performance and the process used.

An HR practitioner can gather appraisal forms used by other organizations, and the

literature provides plentiful information on different approaches. But the sensitivity

of strategies for managing performance to the type of culture existing in an organi-

zation makes emulating other organizations a risky business. Referring back to the

Treacy and Wiersema strategy model, an organization that is relying on product lead-

ership as its competitive advantage is likely to value different behaviors and results

than an organization relying on operational excellence. The former will be more

apt to value innovative, risk-taking behaviors, while the latter will value productivity

and cost containment more highly. Another example would be an organization that

is attempting to determine if a particular type of training yields a high return on

investment. It may find that success in a competitor that utilizes a different strategy to

attain competitive advantage may not pay off for the organization...extensive training

for customer-service personnel might yield a much higher payback for Nordstrom’s

than it would for Wal-Mart.

If an organization believes that a new or revised HR strategy/program might be

beneficial, it is possible to eschew benchmarking against other organizations or

even other parts of the same organization. This might be the case if the unit has a

context that is quite unlike any that could be used to benchmark. The alternative

is to conduct an experiment that is structured to measure whether an intervention

has the desired effect, no effect or an undesirable effect. Research methodology is

readily available to help the practitioner structure such an experiment, and although

this may consume considerable resources, if the potential payback is large enough,

it might warrant the investment. This may be the only approach that can produce

the required level of certainty in cases where the benefits of being correct and costs

of being wrong are large.

CONCEPTUAL FOUNDATION

When the contexts across organizations differ, it is still possible to predict how

a program successful elsewhere might work in the benchmarking organization.

However, for this to be feasible, it is necessary to ask a series of “why” questions.

If a program is highly successful in a competitor organization, the bench-marker

needs to discover why that program worked.

Did it work because it was particularly suited to the other organization’s

context, or did it succeed because it was based on a sound conceptual foundation?

For example, the premise “you get what you measure and reward” is supported

by research findings. Research also supports expectancy theory, which posits


that if an employee believes that

producing outcomes desired by the

organization will result in receiving

valued rewards, the employee will

be motivated to work towards that

result. This is, of course, dependent

on the belief that the employee is

capable of producing that result and

that the organization will recognize

and reward it as promised. So if a

sales-incentive plan used by another

organization rewards sales volume,

desired sales mix and profitability

of sales, and these are the same

metrics the benchmarking organiza-

tion thinks to be appropriate, it is

reasonable to consider using them.

But if the organization values other

outcomes or places different relative values on these metrics, the plan should

reflect that, rather than copying the other organization’s program.

The final decision on plan design should not be made on competitive condi-

tions alone. The conceptual soundness of its structure must also be considered.

Research suggesting which conditions are likely to produce the desired outcomes

is very valuable. Often practitioners are reluctant to use research because they are

unsure about its relevance to their issues. And it is important to ensure that the

research will increase the quality of decisions. There are two types of research

validity a user should be concerned about. Internal validity addresses the veracity

of the research findings—it is impacted by the quality of study design and execu-

tion. But one must also be concerned about external validity—how valid the

study findings are likely to be across contexts. The synthesis of multiple studies

is one tool used by researchers. This contributes to the likelihood that the results

are valid and may also provide some indication of how robust the findings are

under different conditions. Armed with this knowledge, an HR practitioner can

make informed projections about the probable success of an imported program.

Therefore, benchmarking can become a two-pronged activity, comparing to

competitors and to research findings.

If an organization wants to innovate and offer employment conditions providing it

a competitive edge, there may be no experience to copy. By definition, creativity is

lonely. But by using research findings, the innovator can lessen the risk of adopting

a unique practice. An example of a practice that is heavily supported by research

but difficult to benchmark against other organizations is the “realistic job preview.”

Put simply, this is telling the whole truth and nothing but the truth to employment

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❚ Benchmarking

❚ Benchmark.

www.worldatwork.org/bookstore

❚ Market Pricing: Methods to the Madness

❚ Survey Handbook & Directory:

A Guide to Finding and Using Salary Surveys.

www.worldatwork.org/education

❚ C17: Market Pricing—Conducting

a Competitive Pay Analysis

❚ Competitive Market Pay: Pricing

Sales Positions.


candidates. Research has shown this practice typically reduces unwanted turnover

during the first 18 months of employment. But if one were to ask practitioners in

other organizations if they were honest with candidates when interviewing them,

how much faith could be placed in the results of that survey?

One company the author consulted with had several major call centers, and each

center was plagued by high turnover among people with less than a year’s service.

This represented a significant cost, since the training required for new employees

was significant. They started requiring all potential applicants to watch a film

entitled “Thirty Minutes In The Life Of A Center Operator” before they completed

an application. Many applicants who might have accepted employment if the film

had not been viewed did not apply. They left because they were appalled by the

daily work routine depicted realistically in the film. So even though this practice

reduced the number of candidates, it is likely that those driven from the building

in reaction to the film would have become turnover statistics—after the organiza-

tion had invested in training them. The realistic job preview can inoculate new

employees against some negatives to be experienced and also begins the employ-

ment relationship on an open and honest basis. If the preview is expanded to be

an employment preview, including information about the organizational culture

and other environmental realities which might influence employee satisfaction,

the value of this tool can be increased.

Many HR practitioners are reluctant to use research, even though it can provide

conceptual/ theoretical guidance. Much of the research is buried in academic journals,

inaccessible to the lay person who lacks the tools to break the code in which it is

written. But research findings may represent a treasure chest of guidance when adopting

innovations that cannot be supported by benchmarking against other companies.

Many organizations consider their HR strategies/programs as a competitive advantage

and are unwilling to share any substantive information with other organizations.

This makes high-quality benchmarking data even more difficult to find.

Even when plentiful public information is available about particular approaches,

caution should be exercised when one accesses the HR literature. The articles about

successes with “new” approaches are not offset by articles about the failures, which

produce a very biased indication of how well something might work. Few practi-

tioners or consultants are anxious to write about their abject failures, since this is

hardly a career-enhancing activity. Surveys of the technique called “broadbanding”

in the late ‘90s seemed to indicate a keen interest by most organizations, but if

one took care to dig deeper, it turned out to be a lot of interest without a lot of

implementation. In those instances where implementation did occur, the outcomes

reported in the literature seemed to be universally positive, an unlikely finding.

Retreats from the approach, several of which the author participated in, were never

the subject of articles or news releases.

Therefore, if the anecdotal literature is going to be used in benchmarking, one must

take care to recognize it as a biased source of information. Conversely, the research


literature consists of studies that were more rigorously designed and conducted,

with positive, negative and neutral results being reported. This happens because

the research must propose the hypothesis being tested in advance of conducting the

study, thereby avoiding the bias caused by reporting only positive results. Researchers

are given credit for finding out what does not work if they do it rigorously, since they

are contributing to the knowledge pool. Practitioners in organizations are typically

not rewarded for experiments that fail.

CONCLUSION

Every HR practitioner should endeavor to understand what other organizations are

doing relative to his/her HR strategies/programs. It is important to develop a brand

as an employer, and knowledge of how the competitors for people are presenting

themselves to the marketplace is critical. When it is discovered that a particular

approach is becoming widespread, the first step is to understand the approach and

then to attempt to determine why its usage is increasing. It may be in response

to changes in the business environment or supply-demand conditions in the labor

markets. Or it may represent an innovation that should be considered. Information

about the experiences of other organizations with the approach should be sought

and, if it exists, it should be analyzed to determine whether a pattern of success or

failure exists and what factors affect the results. The second step is to evaluate the

probable fit of the approach to the organization’s culture, strategy and structure and

how the internal and external realities faced by the organization might impact its

effectiveness. The third step is to assess the conceptual/theoretical validity of the

approach, assuming that research exists that makes this possible.

A Conference Board research study (2007) suggests “evidence-based HRM (human-

resource management) applies scientific standards of causality to demonstrate how

intangible human capital can be observed and shown to add to business results.”

Most practitioners aspire to provide tangible business results and, therefore, should

be open to methods that enable them to do so.

Benchmarking has its place in human-resource management. But its limitations

must be understood and caution exercised when attempting to import a strategy/

program from another organization. It may be necessary to emulate prevailing

practice to remain competitive, but it is easy to conclude that it is imperative, only

to find that the practice did not travel well and that the impact was not the same.

Popularity does not ensure effectiveness. ❚


Casco, Wayne F. 2006. “Decency Means More Than Lower Prices.” Academy of Management Perspectives,

August: 26-37.

The Conference Board. 2007. “Evidence-Based Human Resources.” Research Report E-0015-07-RR.

Treacy, Michael and Fred Wiersema. 1997. The Discipline of Market Leaders. New York: Basic Books.

Trompenaars, Fons. 2007. Riding the Whirlwind. Infinite Ideas. Oxford, England: Infinite Ideas Ltd.

REFERENCES

Robert J. Greene, Ph.D., CCP, CBP, GRP, SPHR, GPHR, is the CEO of Reward $ystems Inc. in Glenview, Ill.

He has published more than 75 articles and book chapters and was awarded the first Keystone Award for attaining

the highest level of excellence in the field by the American Compensation Association (now WorldatWork).

He has designed and taught certification courses and seminars for numerous professional associations around

the world. He serves on the faculty for DePaul University in their masters of business administration and masters

of science in human resource management programs.

AUTHOR

Medical centers have a strong scarcity of profes-

sional talent that is not projected to improve

in the foreseeable future. Trends show the

general population is aging, and the number of nurse-

training programs is insufficient for current and future

employment demand. Nurses, who represent the largest

professional group in a medical center, are not the only

jobs in scarce supply. Medical centers also struggle to

attract and retain therapists, medical technologists,

pharmacists, physicians and other technology jobs.

What are the high-performing medical centers doing to

ensure that they have the talent necessary to provide

quality patient care and clinical outcomes? What are

the implications for other types of organizations where

talent makes a significant difference?

This study examines the retention strategies and

pay and rewards practices of a sample of the best-

performing medical centers and hospitals in the United

States. Twenty-one organizations ranked by U.S. News

& World Report participated. A structured interview

with an open-ended questionnaire was used to gather

information from these organizations from CEOs, major

Workforce Retention and Pay

and Reward Practices

in America’s Best Hospitals

Patricia K. Zingheim, Ph.D.

Schuster-Zingheim & Associates Inc.

Jay R. Schuster, Ph.D.

Schuster-Zingheim & Associates Inc.

❚ Compensation

Second Quarter 2008




operating executives and heads of human resources. The questionnaire is included

in the appendix.

US News & World Report (2007) published a study of performance excellence of

“America’s Best Hospitals” based on 5,462 hospitals and identified 173 that led the

field in terms of excellence based on reputation, mortality index and other care-

related factors distinguishing the best from the rest in as objective terms as possible.

While the results of excellence are either measurable or observable, the route to

success is less transparent in many instances, especially from the standpoint of

workforce leadership and practice. This paper sampled and studied 21 of the 173

America’s Best Hospitals, including 12 of the top 18 “Honor Roll” elite performers.

These 21 organizations were willing to be telephonically interviewed in depth for

an extended period, answer the authors’ questions based on a patterned interview,

and provide the detailed information needed for a thorough understanding of what

they do to retain, pay and reward scarce/critical talent.

SCARCE/CRITICAL TALENT

The objective of the top-performing medical centers surveyed is to use their

resources most effectively to accomplish their mission of providing health-care

excellence. This means focusing retention and pay and rewards on the talent who

provide clinical care to patients. Medical centers define these people as scarce,

critical, core and/or professionals in centers of excellence. The term “scarce/critical

talent” will be used in this paper to describe them. Top-performing medical centers

increasingly focus retention, pay and reward resources on scarce/critical talent

rather than the workforce in general.

Nursing is universally included in this scarce/critical talent definition—registered

nurses (RNs), licensed practical nurses (LPNs) and licensed vocational nurses (LVNs).

The talent group also may include research scientists and investigators into new

treatments and cures if the organization is research-based. Other scarce/critical work

roles commonly include technologists in the chemistry sciences, physical therapists,

respiratory therapists, pharmacists, physicians, nursing support technicians, some

other licensed professionals and managers who retain talent in these jobs. Examples

of centers of excellence where scarce/critical talent often work are cancer, heart,

eye and ear centers.

STRATEGIES FOR SCARCE/CRITICAL TALENT VERSUS OTHER EMPLOYEES

The top-performing medical centers in this study have unique strategies and

programs for their scarce/critical talent compared to those for administrative talent,

less-skilled talent and other nonscarce/critical talent. For the administrative and less-

skilled talent, there is less concern about retention and the market competitiveness of

pay. The medical centers studied do not focus on defining and rewarding skill and

career growth for these jobs compared to scarce/critical talent. Nor do they focus

as strongly on developing measures of skill growth or outcome measures as they


do for clinical skill growth and clinical outcome measures. The emphasis for best-

performing organizations is clearly on retention of skilled talent who are close to

the core of health-care delivery and essential to the creation of a high-performance

health-care workplace.

All medical centers in the study sample are nonprofit. In the 1980s, many nonprofit

medical centers were principally concerned with social justice and often paid

lower-skilled jobs (e.g., food service workers and housekeepers) higher relative to

their competitive labor market than they paid professional and administrative jobs.

Their reasoning was based in social equity and thereby ensuring a living wage.

Only two of the medical centers in this study (10 percent of the participants) raised

social justice as a pay objective. The other 19 medical centers are developing and

implementing unique retention and pay and rewards strategies and programs based

on talent scarcity/criticality.

Because of this differentiation, a number of the medical centers studied

commented that they have increased their communication to administrative talent

and lower-skilled talent about why programs are different for different popula-

tions. The objective is to gain these employees’ understanding of the reasons

and thereby increase their acceptance of the differences. One of the communi-

cation messages is the organization’s inability to accomplish its mission without

the scarce/critical talent, thereby jeopardizing not only the organization’s future

but also, more importantly, patient health, frequently in life-and-death situations.

Another message is that the labor market moves differently for different jobs based

on labor supply and demand and that the organization needs to acknowledge

these differences in how it pays.

RETENTION STRATEGIES AND ACTIONS

Some CEOs described retention of scarce/critical talent as on par with, or second

only to, patient outcomes as organizational goals—on par because scarce/critical

talent is considered necessary to achieve patient outcomes. One executive said that

retention is viewed as more important than recruitment because the cost of turnover

is so high, and successful retention reduces the need for recruitment. One CEO said,

“We have learned that keeping our most-skilled talent is really a ‘war for life’ as it

relates to our patients. We can’t quit growing talent.”

In addition to recognizing that people stay with an organization when they feel

valued and appreciated, are respected and receive personal attention, study partici-

pants outlined retention strategies and actions covering a variety of factors. Figure

1 shows a summary of these retention strategies and actions that do not directly

involve adding pay cost. As the figure shows, retention of scarce/critical talent is

multifaceted and is not achieved by addressing only one factor. These organizations

truly believe that “You make us great,” as one CEO said, and hold leadership and

HR responsible for retaining scarce/critical talent. Leadership must be part of the

solution, not part of the problem.


Examples of Successful Retention Actions

The most frequently mentioned examples of retention programs and actions that

have been successful with scarce/critical talent are:

❚ Provide child-care and elder-care benefits, with on-site centers being the strongest

and preferred benefit (57 percent of the 21 surveyed medical centers).

❚ Enhance total compensation for scarce/critical talent near retirement age to

encourage them either not to retire or to work beyond normal retirement age.

Actions include a base-pay adjustment, bonuses, ensuring competitive pay, adding

to retirement benefits for each year that the individual stays with the organiza-

tion, part-time work and accommodating the individual’s interest in work hours

(52 percent of the medical centers).

❚ Communicate about the medical center’s reputation for excellence because people

generally want to be associated with “winners,” and communicate messages about the

medical center’s association with the university (48 percent of the medical centers).

The first two successful retention actions reflect the demographics of scarce/

critical talent. The first retention action acknowledges the family needs of scarce/

critical talent. The second action addresses the aging of the scarce/critical talent

workforce and the other employment opportunities available to experienced talent

FIGURE 1 Retention Strategies and Actions

Retention Factor Approach to Retain Scarce/Critical Talent

of 21 Top-Performing Medical Centers

Employee satisfaction ❚ Baseline, place to start.

❚ Does not distinguish or differentiate medical center.

Employee engagement ❚ Most critical to retention.

❚ Engaged scarce/critical talent is essential to accomplishing the

organization’s mission and patient-care solutions.

Organization culture ❚ Most frequently mentioned culture: professionalism.

❚ Successful, patient-focused creative medical culture, care-giver

(not “money-grubber”), healing culture, health-care excellence/quality.

Supervisory/manager role ❚ Developers, advisors, educators, coaches, mentors, trainers

❚ Role models, example-setters

❚ Enablers, barrier-breakers, interference-blockers

❚ Communicators.

Work environment ❚ Enabling.

Communications ❚ Method: Small group, face-to-face, Web/intranet (with home access),

CEO Webcasts, multiple approaches, de-emphasis on written.

❚ Style: Often, specific, honest, straightforward, both talk and listen.

Training and development ❚ Invest in yourself, grow as much as you want, employee choice,

in charge of your own development.

❚ Medical center enables opportunities.

❚ “Keep skills fresh.”

Career opportunities ❚ Job rotation

❚ Medical center facilitates job movement—no siloing

❚ “Employee for life” with medical center by providing career opportunities.

Pay and rewards ❚ Integrated with other retention strategies and actions.


(e.g., case management, care coordination and health coaching in health-insurance

companies). The third action highlights these medical centers’ reputation advantage

used not only in recruitment but also in retaining scarce/critical talent by ensuring

the organization is run consistent with its reputation.

Examples of Unsuccessful Retention Solutions

Twenty-nine percent of the medical centers reported that none of their retention

solutions failed, which they believe implies that organizations should move forward

on identifying retention objectives and target-employee groups, and then design

and implement retention programs. For those medical centers that reported some

unsuccessful retention solutions, the majority of the unsuccessful actions can be

categorized into three groups:

❚ Recognition programs that had gimmicks or games were mentioned by 43 percent

of the 21 study participants (although one medical center said that these worked

for its hourly workforce). Other recognition programs, however, do work—for

example, one medical center executive described a strength, hope and caring

award for nurses.

❚ Rigid pay systems that did not focus most on specific critical skills, did not match

the necessary skills and/or paid the same amount to everyone were mentioned by

19 percent of the study participants. Pay systems must be agile and respond to not

only the labor market but also evolving skills and competencies and performance

measurement capabilities.

❚ Any solution that appeared to be a “flavor of the month,” was primarily based on

slogans or sounded like a sales pitch was mentioned by 14 percent of the study

participants.

These programs and actions may have proven unsuccessful because they seem

inconsistent with the most common organizational culture reported by the medical

centers—a cultural of professionalism—or with the importance of skills to licensed

professionals who have made a skill investment in themselves to have become a

licensed professional.

Measuring Results of Retention

The success of retention programs/initiatives is measured, as expected, by the reten-

tion of scarce/critical talent, but the measurement is specific to whatever employee

groups are particularly critical to the organization (for example, top performers,

specific licensed professional expertise such as registered nurses, employees near

retirement). The second most frequently used measure to evaluate retention program

success is overall organizational success.

PAY AND REWARDS STRATEGIES AND PRACTICES

One CEO said, “Don’t be stingy on paying top performers, or our patients pay

for it with their lives.” Providing at least market-competitive compensation is


considered necessary to retain scarce/critical talent because these individuals

are often aggressively recruited by others. Two-thirds of the study participants

use both base pay and variable pay to reward scarce/critical talent for skills and

performance. Study participants differ about whether they position scarce/critical

talent roles similarly or differently in competitiveness relative to the labor market

based on the degree of criticality of the role’s skills. Total cash compensation

programs also vary among the study participants based on their emphasis on

rewarding skill growth, individual performance and clinical outcomes.

Objective

For two-thirds of the 21 top-performing medical centers studied, individual

performance is an objective for determining base-pay increases and lump-sum

payments, if used, for scarce/critical talent. Forty-eight percent reward skill growth.

The majority that pay for skills emphasize skill growth over individual performance

because 19 percent of the study participants pay more for skill growth than indi-

vidual performance, and 14 percent pay only for skills, not individual performance.

The least frequent approach, used by 19 percent of the study participants, is not

paying for performance but paying for tenure/service, internal equity and social

justice. Figure 2 on page 22 shows a summary of total cash compensation practices

of the top-performing medical centers studied.

Most of these top-performing medical centers evolved from the typical practice

15 years ago of paying for tenure and service. In fact, 38 percent of the study

participants mentioned they must pay the top performers more than their fellow

scarce/critical-talent colleagues to retain them and reflect their value. The strong

usage of paying for skill growth, compared to other industries, reflects the profes-

sionalism of scarce/critical talent in medical centers and the rapid advancements

in medical care and technology.

Base Pay

Two-thirds of the 21 study participants position base pay for all or some of their

scarce/critical talent roles more competitively than the labor market. Examples of

competitive positions higher than the median labor market are 5 percent to 20

percent above market and 60th to 75th percentile.

Base-pay increases are not determined primarily on movement in the labor market.

About one-half of the study participants increase scarce/critical talent’s base pay for

growing skills. This addresses the need to stay up-to-date in skills and to encourage

career growth. Some study participants have career ladders, particularly for regis-

tered nurses, and some of these medical centers have dual career ladders enabling

rotation between supervisory and professional roles to keep skills current.

Paying for skill growth requires the identification and measurement of skills.

A few organizations reported that measurement is a challenge—particularly

refining measurement of skills to keep current with advancements in medical care


and technology. One executive reflected on the challenge of rewarding scarce/crit-

ical talent primarily for skills: “People grow at different speeds and rates over time.

We must keep pay and rewards corresponding with how the individual grows.

This is an individual issue. Managers and leaders must watch this in a large

organization like ours. It is a huge challenge but a necessity.”

FIGURE 2 Total Cash Compensation Practices

Pay and Feature of Pay Scarce/Critical Talent Practice

Rewards Element and Rewards Element of 21 Top-Performing Medical Centers

Overall objective Objective for base-pay ❚ 67% pay for individual performance.

increases and, if used, ❚ 48% pay for skill growth and usage—

lump-sum awards 19% reward skill growth more than performance

and 14% do not report paying for individual

performance.

❚ 19% do not pay for performance (focus on

tenure/service, internal equity and social justice).

Base pay Competitiveness Majority pay scarce/critical talent more than the

competitive (none pay less than competitive)

as follows:

❚ 14% make or lead the market (highest payer).

❚ 38% pay better than competitive.

❚ 14% pay either competitively or better.

❚ 33% pay competitively.

Top performers ❚ 38% position base pay most competitively

for best/top-performing scarce/critical talent.

Individual reviews/ Timing ❚ 19% provide quarterly reviews with eligibility

evaluations for base-pay increases and lump-sum payments

for skill growth and/or individual performance.

Variable pay Usage ❚ 67% have variable pay for scarce/critical talent

below senior managers (14 of 21 participants).

❚ 19% believe variable pay is inappropriate for

health care or is unethical in a university setting.

❚ 10% have eligibility only for senior managers

(executive and director levels).

❚ 5% do not use variable pay but see value in it.

Types Of those with variable pay:

❚ 43% reward results on achievement of clinical goals.

❚ 21% reward acquisition and usage of new skills.

❚ 14% have a lump-sum payment for skills and

goal achievement/merit/individual performance.

❚ 7% have a lump-sum payment for individual

performance/merit.

❚ 7% have a lump-sum payment for performance

if base pay is near the top of the salary range.

❚ 7% have cash awards for excellence.

Metrics ❚ Skill growth and effective usage.

❚ Clinical measures and outcomes.

❚ Quality, patient satisfaction, access to care,

community-focused metrics.

❚ Not cost savings, productivity or income for

individual contributors because study participants

are philosophically opposed to these metrics

(although financial metrics may be used for

executives in some organizations).


In addition to rewarding skill growth, a frequent organizational objective is not

just to discuss, but to actually provide, the highest base pay to the best performers

who are scarce/critical talent. A few reported that their pay-for-performance program

needs improvement. Also some medical centers that reward individual performance

with base-pay increases either have not found this approach to work effectively with

less-skilled employees who are not scarce/critical talent or have not tried to pay for

individual performance with their less-skilled employees.

Nineteen percent of the study participants provide scarce/critical talent with quar-

terly reviews or evaluations and eligibility for quarterly lump-sum payments for skill

growth and/or individual performance. Quarterly lump-sum awards may also be

accompanied by a quarterly base-pay increase. The objective is to provide more

frequent opportunities for feedback, recognition and compensation awards and to

enable faster response to labor market changes.

Variable Pay

Sixty-seven percent of the 21 top-performing medical centers studied use variable pay

for scarce/critical talent below the senior management level. About one-fifth, however,

believe variable pay is inappropriate for health care or in a university setting. Another

medical center would like to use variable pay, and some would like to use incentive

plans rather than lump-sum awards, but their university restricts their ability to do so.

A variety of types of variable pay plans reward a variety of different accomplish-

ments. Study participants use lump-sum payments, incentive plans and cash awards.

The most common form of variable pay is an incentive plan for rewarding results on

achievement of clinical goals. Also common are lump-sum payments for either skill

acquisition and usage or individual performance or a combination of the two.

Incentive plans universally use clinical outcome metrics to focus on and reward

what is important to patients. Financially oriented metrics, including cost savings,

productivity and income, are not used for incentives for the general scarce/critical

talent population because study participants believe this sends the wrong message

and motivates the wrong behavior. The absence of financially oriented metrics is

substantially different from the incentive practices of other industries but is consis-

tent with the medical centers’ predominant culture of professionalism and caring,

their nonprofit status and the way others, including U.S. News and World Report,

measure health-care excellence.

Examples of Total Cash Compensation Programs

These medical centers designed their total cash compensation programs for scarce/

critical talent differently from common practice for general industry. Frequently, they

said that the program was designed and evolved based on their own specific needs.

They did not base design on the practices of others; in fact, other hospitals and

medical centers tend to copy these study participants. The following five examples

show the variety of total cash compensation programs.


One executive described his program as follows: “Performance management is

linked to both skill scarcity and to the clinical metrics that apply. Each job area

has a ‘scarcity’ factor that magnifies the performance rating. If individuals receive

a ‘3’ rating in a scarce skill, they earn a larger base-pay increase or incentive lump

sum than others in a less scarce area would earn. About 60 percent of our nursing,

technology, science, etc., areas are in high scarcity, so that influences the results of

the performance rating. It keeps us from paying everyone in a scarce skill the same

even though they are not great performers, and the workforce accepts this. Some

will get a 9-percent pay raise, for example, and a 6-percent lump sum during the

year, perhaps spread out.”

An executive of another top medical center studied said, “We pay more for the

skill and competency of physicians, RNs, technical people, even LPNs and LVNs and

radiology and medical technologists than for performance. We combine skill growth

with clinical measures that make a difference to the medical center. We developed

a long list of the skills and competencies in the critical talent areas. We defined

what this skill is for ‘minimal talented,’ ‘fully talented’ and ‘exceptionally talented.’

We use these in performance management and in setting goals related to clinical

areas. Performance management impacts base pay, and clinical goals determine

incentives that are awarded annually in cash. The program works well, considering

the complexity of the performance issue in a changing medical technology.”

A third executive said, “Our program for professionals, including all of our key skill

roles like physicians, nurses, researchers, technical staff, etc., is called ‘Sum Total.’

Each year-end, everyone is evaluated by first a peer rating and then the manager

and the next-level manager make the decision relative to both base-pay adjustment

and incentive award. Guidelines maximize the base-pay adjustment at about 10

percent to 12 percent of base pay but can additionally grant up to a 20-percent

incentive based on clinical outcomes and patient access and other key health-care

center medical performance issues.”

A fourth medical center’s executive described the scarce/critical talent program

as: “We pay for the skills we need since these are licensed professions with

standards. Our focus is to align pay adjustments based on performance to how

nurses learn and grow and take on more assignments. Nurses are offered specific

career ladders based on a combination of service and performance. So we pay

for performance. Other professional systems are based on the working nursing

system: (1) Assess nurses and clinical professionals as often as quarterly but at

least annually; (2) Pay about 5 percent above market at all times and more for

high performers and unique nursing skills; (3) As a result of the individual’s

assessment, pay is adjusted, with premiums for working in the most critical

centers of excellence with the most shortage of skills; (4) Lump-sum cash awards

in addition to base-pay adjustments reward acquisition of new skills that are on

a ‘critical professional skill list’; (5) Goal is to keep ahead of market in total cash

compensation and make it specific as to what is needed to be paid at this level.


Pay focuses on keeping up with skill.

Performance is application of these

skills to help our organization.”

Finally, another executive commented

on her medical center’s skills focus:

“We review all nurses and therapists

every quarter. We are looking for

skills updates and application. If so,

they receive either a lump sum or

a base-pay adjustment. Adjustments

are small as are lump sums, but they

amount to more than competitive on

an annual basis.”

Recognition

Verbal recognition is considered

essential and communicates to scarce/

critical talent that their contributions

are sincerely appreciated and that they

are “special.” In addition to verbal

recognition, effective recognition for

scarce/critical talent acknowledges

professionalism, patient commendation and living the medical center’s values.

As described earlier, the most common comment about recognition was that

gimmicks, coupons or games were ineffective for professional scarce/critical talent.

Excluding verbal and written recognition, 29 percent of the medical centers studied

do not use recognition programs for scarce/critical talent or use them sparingly—

sometimes after having overused such programs. Most of the medical centers,

however, use recognition programs. About one-fifth of the study participants

reported their recognition programs work well, while about one-fifth reported that

they cannot measure their recognition programs’ value or their programs are moder-

ately successful for retention.

Overall, recognition programs are not viewed as a key driver for retention even

though the top-performing medical centers have customized their programs to the

professionalism of their scarce/critical talent. Figure 3 on page 26 shows a summary

of recognition and benefits practices of the top-performing medical centers.

Benefits

Ten percent of the study participants believe liberal benefits, particularly retirement,

give them a differential advantage in retaining scarce/critical talent. As discussed

earlier, child care and elder care are strongly successful retention tools. Because

these organizations are in the health-care industry, providing health insurance is not

RESOURCES PLUS


www.worldatwork.org

Type in any or all of the following search keywords

on the search line:

❚ “Retention strategies”

❚ Rewards

❚ Pay.


❚ High-Performance Pay: Fast Foward

to Business Success

❚ Recognition at Work: Crafting a Value-Added

Rewards Program, Second Edition

❚ Collection of Articles from WorldatWork

❚ The Rewards of Work : What Employees Value

❚ Cash Bonuses: Four Ways to Attract, Retain

and Motivate Employees, Second Edition.


❚ T1: Total Rewards Management

❚ C12: Variable Pay—Incentives, Recognition

and Bonuses.


only a necessity for recruitment and retention but also a philosophical cornerstone.

Flexible scheduling provides no differential advantage since all hospitals and medical

centers provide this.

Next Steps

Study participants reported a variety of next steps to improve pay and other compen-

sation-related rewards programs. The most common were:

❚ Make sure pay keeps up with the desired competitive market position and the

individual’s skills and skill growth.

❚ Improve and refine metrics for measuring skill growth, performance management

and/or clinical outcomes.

❚ Build programs to retain current scarce/critical talent approaching retirement,

although some also mentioned concern about retaining scarce/critical talent newer

to the profession or within the first three years of hire.

LESSONS LEARNED

These organizations have recommendations that can apply to more than just medical

centers. These include:

❚ Work on retention and pay and rewards programs together so they are integrated.

❚ Get beyond strategizing and act. Retention, pay and rewards for scarce/critical

FIGURE 3 Other Rewards Practices

Pay and Feature of Pay Scarce/Critical Talent Practice

Rewards Element and Rewards Element of 21 Top-Performing Medical Centers

Recognition Type ❚ Verbal and professional recognition

is most important.

❚ Mixed response to “fun” recognition—43% report

gimmicks do not work for scarce/critical talent

population (e.g., games, contests, coupons).

❚ Excluding verbal recognition, additional comments

on recognition programs are as follows:

- 24% cannot measure programs’ value for retention.

- 19% report programs are working well.

- 19% use recognition sparingly, have overused

recognition or use programs for other than

scarce/critical talent.

- 10% do not use programs.

Benefits Liberal benefits ❚ 10% have a total compensation strategy built

on liberal benefits, particularly retirement.

Health insurance ❚ Necessity and cornerstone since health care

is their business.

❚ Would be a negative if this was not provided.

Child care and elder care ❚ Positive retention program.

❚ It’s best if these are provided onsite rather

than reimbursed

❚ Several organizations implementing this year.

Flexible scheduling ❚ Not a differential advantage for retention because

all medical centers provide it.


talent must be addressed sooner rather than later before more talent leaves the

organization. Develop a concrete improvement solution, communicate it, take

action with fast implementation and show examples of it working.

❚ Capitalize on whatever differential advantage your organization has. The smallest

organization in the survey, for example, uses its size as an advantage because

of the personal touch it can give to scarce/critical talent and the communication

that everyone is important to the organization.

❚ Continue to improve communications about a variety of messages, including develop-

ment opportunities and how valuable scarce/critical talent is to the organization.

❚ Train managers on importance of retention. Set in place more aggressive retention

programs that are geared to intercept problems before they become acute.

The bottom line, as one executive said, is to make it both financially attractive

and career attractive for top performers with scarce/critical skills to stay with

the organization.

SUMMARY

These premier medical centers studied are focused on retaining scarce/critical talent

and are aggressively developing and implementing retention, pay and rewards strat-

egies, programs and actions to retain this talent. Senior leadership views this as

a business necessity for the organization to continue to achieve its mission and

clearly understands the cost of losing scarce/critical talent. These medical centers

have adopted some similar retention, pay and rewards programs that reflect the

demographics and needs of the health-care industry’s scarce/critical talent and have

also customized retention, pay and rewards programs to fit their organization’s

specific values and culture. Although the specific approaches may differ for different

industries, the lessons learned are applicable to all types of organizations that are

struggling but must retain scarce/critical talent. ❚

U.S. News and World Report 2007. “America’s Best Hospitals.” http://health.usnews.com/sections/health/

best-hospitals. Viewed: March 24, 2008.

REFERENCE

Patricia K. Zingheim, Ph.D. and Jay R. Schuster, Ph.D.

are partners in Schuster-Zingheim and Associates Inc.,

a globally recognized pay and rewards consulting

firm located in Los Angeles and founded in 1985.

They consult with a wide range of companies throughout

the world on the development of total rewards, incen-

tives and other pay solutions. Schuster and Zingheim

received the Keystone Award from WorldatWork in

2006. They were selected as pay and motivation

gurus in The Guru Guide. They are authors of three

rewards books: High-Performance Pay: Fast Forward

to Business Success (WorldatWork 2007), Pay People

Right! Breakthrough Reward Strategies to Create Great

Companies (Jossey-Bass 2000) and The New Pay:

Linking Employee and Organizational Performance

(Jossey-Bass Publishers 1996). They are authors of

more than 300 papers in business magazines on the

subjects of rewards and organizational effectiveness.

Both are contributors to publications such as Fortune,

Across the Board, The Wall Street Journal, Working

Woman and Business Week. They have appeared on

many television, cable and radio programs including

CNBC, CNN, NBC and CBS. They speak throughout

the world to leadership audiences interested in creating

a high-performance workplace through people. Their

Web site is www.paypeopleright.com.

AUTHORS


Key Question: What role do workforce retention

and pay and rewards play in supporting an

excellent-performing organization like yours?

SZA would like to know about how your organization

does the following:

1 | What are your current challenges and

strategies related to retention and also pay

and rewards?

2 | What practices have been successful, and

what have been less successful?

3 | To what extent does your organization pay

for performance? How does it work? What have

been the results of the program?

4 | What next steps or actions do you plan to take?

5 | What suggestions and recommendations do

you have for others?

6 | What has been especially successful relative

to communications and gaining workforce

understanding, acceptance and engagement?

RETENTION

7 | Please describe your organization’s most

pressing talent-retention challenges.

8 | What has been your experience relative to why

employees leave or stay with the organization?

9 | Please describe your organization’s strategy

related to talent retention.

10 | What skill and competencies are critical to

your organization to retain and why?

11 | What role do you believe the following play

in workforce retention?

❚ Overall employee satisfaction

❚ Employee engagement

❚ Organizational culture

❚ Supervisor/manager/leadership relations

❚ Work environment

❚ Communications

❚ Training and development

❚ Career opportunity

❚ Base pay

APPENDIXFocused Interview Guide For Study of Workforce Retention Plus Pay and Rewards in America’s

Top-Performing Hospitals

Schuster-Zingheim and Associates Inc. (SZA) is exploring strategies, practices, and evaluative experiences

and comments regarding workforce retention plus pay and other rewards for employees, particularly hard-

to-retain employees. You are one of the top health-care organizations in the USA. We are studying how

top-performing organizations address critical human-resource management issues including the following:

1 | Workforce retention challenges and solutions

2 | Pay and rewards, including paying for performance.

Our goal, if you are willing, is to gain insight into your practices, why you follow them, what the results are,

and what you have learned about these workforce issues in your journey to excellence. The organizations studied

will not be listed, and individual input will not be attributed to you in any way. All that will be said is that a

top-performing health-care organization reflected specific thinking on a topic and anonymous quotes will be

used to add light to a concept or idea you provide.


❚ Incentives/bonuses

❚ Recognition and recognition awards

(cash or noncash)

❚ Employee benefits (e.g., health insurance,

retirement, PTO)

❚ Work-life benefits (e.g., flexible hours,

job sharing, job rotation)

❚ Other. What other?

12 | What practices have worked best for retention?

Why?

13 | What practices have not worked well for

retention? Why?

14 | What is the next action you plan to improve

retention? Why?

15 | What is the role of the executive team and

managers in talent retention?

16 | How do you evaluate the effectiveness of your

organization’s retention strategy and practices?

PAY AND REWARDS

17 | Please describe your organization’s most

pressing pay and reward challenges.

18 | Please describe your organization’s strategy-

related pay and rewards for the workforce.

For hard-to-retain employees?

19 | To what extent does your organization pay

for performance for the workforce? Why has

your organization adopted this strategy?

❚ Not a strategy

❚ Not truly pay for performance—

although say we pay for performance

❚ Pay market

❚ Pay for competencies and skills

❚ Pay for performance and results

❚ Pay very strongly for performance and

results—with strong pay differentiation

based on performance

❚ Some combination—what combination?

20 | What has been challenging and what has been

successful in measuring employee performance?

Competencies and skills?

21 | If your organization pays for performance

for the workforce, please describe how pay

for performance works in your organization.

What is the program? How would you

evaluate the program’s success?

22 | What pay and reward practices and programs

have worked most successfully? Why?

23 | What pay and reward practices and programs

have not worked well? Why?

24 | What is the next action you plan for pay

and rewards? Why?

25 | How do you evaluate the effectiveness of

our organization’s pay and rewards strategy

and practices?

26 | What has been particularly effective in

communicating pay and rewards for employee

understanding, acceptance and engagement?

SUMMARY

27 | What are your organization’s lessons

learned about:

❚ Retaining employees

❚ Pay and rewards, including paying for

performance if your organization pays

employees for performance.

Thank you very much for your participation.

When considering effective reward-program

implementation, too frequently the role of the

line manager is neglected. Line management

is the lynchpin to executing effective reward programs.

Beyond tangibles like cash compensation, managers have

the most influence on the array of intangible rewards

the organization provides. And, often, these intangible

rewards are the drivers in the company’s “employer of

choice” platform and the primary vehicles in attracting

and retaining talent.

Unfortunately, a majority of organizations get failing

marks when it comes to effectively implementing their

reward programs. In a study of 1,200 organizations in 80

countries, 30 percent of organizations are seen as effective

at implementing their total rewards programs. Attention

should not be limited to line managers in addressing

these shortcomings. While line managers are insufficiently

prepared to take on these accountabilities, many HR func-

tions are inadequately supporting their line managers in

reward-program implementation.

This paper explores the issues around reward-program

effectiveness and the key role that line managers play in

The Role of Line Managers

and HR in Reward

Program Effectiveness

Tom McMullen

Hay Group

Mel Stark

Hay Group

❚ Human Resource Strategy

Second Quarter 2008




this regard. It also explores how the human-resources function must also step up

and find better ways to leverage the manager’s role and better define the role they

could play in helping make rewards programs successful. Managing people effec-

tively is incredibly hard work, but it’s the kind of work that rewards organizations

that do it well.

Hay Group research and the company’s work with clients found that the key

differentiator in successful reward programs is great execution as opposed to

elegant design. In a national study conducted last year by Hay Group, WorldatWork

and Loyola University Chicago, the areas that reward professionals said were

primary differentiators in their reward programs were largely implementation-

related issues—reward communication effectiveness, aligning reward programs

with business priorities and organization values and operationalizing the pay for

performance relationship.

Further, Hay Group’s “Global Line Managers Impact on Reward Program

Effectiveness Study” (McMullen and Stark 2007) reported that most organizations

give themselves failing marks when it comes to effectively implementing their

reward programs.

THE MANAGER’S CRITICAL ROLE

In effective reward-program implementation, consider first the line manager’s role.

Line management is the lynchpin to “making things happen” within the organiza-

tion. Given that managers take the lead role in planning, coaching and assessing

employee performance and reinforcing performance via reward outcomes,

it should also be within their role to influence the employee regarding the intent

and relevance of the organization’s reward programs.

Managers also have the most influence on the array of intangible rewards

the organization provides. Often, these intangible rewards drive the company’s

“employer of choice” platform and are the primary vehicles in attracting and

retaining talent. In this context, managers play a significant role in creating the

work climate of an organization and in creating development and career growth

opportunities for employees.

Moreover, the immediate supervisor is often the lead influencer in the employee’s

satisfaction with the organization. Hay Group’s retention studies during the years

found that, in many situations, when it comes to voluntary employee turnover,

people tend to leave bad bosses rather than bad organizations.

Employees also trust their managers more than any other authority role in the

organization—more than senior leadership and more than HR. A management role

is not just about the traditional functions of “planning, organizing and controlling.”

Managers also play the important role of acting as the “standard bearer” of organi-

zation values—the parental figure within the company. To be effective, managers

need to engage employees’ hearts and minds as well as live and model appropriate

values and behavior.


But there is a problem. Many managers don’t believe their organization’s reward

programs are helping them achieve their objectives. Many times, the authors heard

a manager say the following (Jensen, McMullen and Stark 2007):

❚ “I’m accountable for making huge business decisions, but I can’t spend $15,000 to

reward some of my best people. What’s wrong here?”

❚ My employees see no connection between what they achieve and the amount of

their bonus.”

❚ “I am told that we must pay the market, but our HR department can’t show me

decent benchmarks as to what my people are worth.”

❚ “There is more management attention around here in terms of staying within the

compensation budget than in delivering superior business results.”

So, many organizations and their managers are insufficiently prepared to take on this

critical role. This is reflected in the following findings in the Hay Group “Global Line

Managers Impact on Reward Program Effectiveness Study” of 1,200 organizations:

❚ Less than 40 percent of organizations believed that their managers are effective

at communicating reward programs (from base pay to variable pay, benefits, and

financial and nonfinancial recognition programs).

❚ 35 percent of organizations said their managers are effective at developing connec-

tions for employees between their work and business results.

❚ 28 percent of organizations believe their managers manage the “pay for performance”

relationship effectively.

Figure 1 summarizes HR and line management opinions concerning the perceived

effectiveness of the line manager’s influence on reward programs. In addition to

FIGURE 1 Line Managers’ Impact on Reward Program Effectiveness (McMullen and Stark 2007)

Implementing total rewards programs

Communicating total rewards programs

Communicating rationale for salary increases

Communicating rationale for variable pay programs

Communicating about benefits programs

Coaching employees and providing feedback

Communication about what it takes to advance

Managing overall pay for performance relationship

Utilizing nonfinancial recognition programs

HR Line Manager

60% 40% 20% 0% 20% 40% 60%

Respondent:

27% 34%

34%20%

43%38%

33%

27%

45%

41%

25%

33%

36%

35%

48%

37%

34%

34%

% responding “effective” or “very effective.”


the relatively low ratings across most areas, the HR function tends to have a lower

opinion of line-manager effectiveness in reward-program implementation than do

line managers themselves.

WHERE IS HR?

The authors cannot limit attention to line managers in addressing these shortcom-

ings. While line managers may be insufficiently prepared to take on reward-program

implementation accountabilities, many HR functions are inadequately supporting their

line managers in this regard. Figure 2 summarizes data from the study concerning

the perceived effectiveness of HR support provided to line managers.

While the ratings, in general, are higher for HR support of line managers in the

same reward areas as shown in Figure 1, it is troubling to see the substantial gaps

in the effectiveness ratings of the HR function between HR and line management

respondents. For example, a 23-percent gap exists between HR and line manage-

ment’s opinion of the effectiveness of line managers in their ability in coaching

employees and providing feedback. This raises several interesting questions.

❚ Can HR change if it lacks the awareness of the gap existing between its own

opinion and that of line management of HR’s effectiveness?

❚ With many needs across many areas, how will HR prioritize where to focus its

attention and resources?

❚ Given a fairly dismal track record, is line management prepared to partner with

the HR function to more positively affect reward programs?

FIGURE 2 HR Support Provided to Line Managers (McMullen and Stark 2007)

Implementing total rewards programs

Communicating total rewards programs

Communicating rationale for salary increases

Communicating rationale for variable-pay programs

Communicating about benefits programs

Coaching employees and providing feedback

Communication about what it takes to advance

Managing overall pay for performance relationship

Utilizing nonfinancial recognition programs

HR Line Manager

80% 60% 40% 20% 0% 20% 40% 60% 80%

Respondent:

45%

42%

48%

58%

62%

54%

58%

45%

46%

57%

39%

36%

44%

35%

% responding “effective” or “very effective.”

59%

53%

67%

69%


One might think that the HR function would minimally be focused on lever-

aging best reward implementation practices across the organization, but this

also does not seem to be happening. Only 36 percent of companies report that

HR is effective at leveraging best practices across the organization related to

reward-program implementation. Few business schools or academic programs

focus on the manager’s influence on reward programs, and few organizations

offer management-development programs to help remedy this blind spot for most

managers. Hay Group’s study revealed that less than 36 percent of organizations

thought they did an effective job of education, training and leveraging best prac-

tices in the area of rewards.

WHAT SHOULD ORGANIZATIONS DO?

Hay Group’s research and consulting experience indicates that most managers

are insufficiently prepared to effectively execute and impact their organization’s

reward programs. This may lead one to suggest that the data are suggesting a

“call to arms” or at least a wake-up call for HR to do something more impactful

than current practices suggest.

The HR function has a key role to play: it can work with managers to educate

them about how to influence employees in this area and execute reward programs

effectively. And senior leaders need to turn their attention to the issue. They need

to understand the pivotal role that managers play in influencing the employee’s

view of rewards. Senior leaders also need to appreciate how managers’ impact on

rewards can—assuming it is a positive influence—reinforce the talent-management

processes within the organization.

SHAPING THE ORGANIZATION’S VIEW OF REWARDS

One area where HR can play is in helping shape the organization’s view of rewards.

When managers criticize their organizations’ reward programs, they often focus

on cash compensation. Employees, however, are motivated by far more than cash.

So, before criticizing how unfairly cash compensation is allocated to employees,

managers would be best advised to consider how to communicate about and use the

range of intangible rewards at their disposal as well as the monetary ones. Effective

HR functions work with managers in developing a “total rewards” mindset in the

broadest context to achieve business success.

Total rewards represent the reasons an employee comes to work at an organiza-

tion. Intangible rewards, far from being “nice to haves,” have become core to many

employers’ “value propositions” to current and prospective employees. Intangible

rewards are critical to the overall recruiting and retention strategy and typically

have a meaningful influence on the organization’s competitive reward strategy.

As the manager is the key deliverer of intangible rewards to the employee, HR

functions would be well-served by working with line managers to create a total

rewards framework that is useful for the manager.


As Figure 3 illustrates, total rewards is, in effect, the sum total of what an employee

receives from the organization. This broader characterization of rewards is becoming

more common in the market. As such, it is in the best interest of any organization,

from a financial and an “employment branding” perspective, to leverage this broader

definition of rewards.

Applebee’s, the restaurant chain, does exactly this. Applebee’s identified four types

of rewards (translating to the acronym REAL) that the company offered:

❚ Rewards (financial compensation)

❚ Engagement (ensuring work is fun and fulfilling)

❚ Advancement (personal and professional growth opportunities)

❚ Life (ensuring everyone has a healthy, balanced life).

Applebee’s branded its program the “REAL Deal.” According to Applebee’s Vice

President of Performance and People Systems Scott White, “we took all of our HR

programs and aligned them under each category of the REAL Deal to see what

we have currently offered. There were many components under Rewards, a few

under Engagement and Advancement, but even fewer things under Life. After strategic

sessions with senior executives, which were designed to determine where Applebee’s

would win in the marketplace, it was decided that when you really look at why people

come to work for us, it’s not for the money. People are primarily joining because they

are committed to this idea of being a good place to work, of having good leaders and

letting people have an enjoyable work experience in a very tough industry” (Jensen,

McMullen and Stark 2007).

Common Examples Reward Elements Definition

❚ Quality of work

❚ Work-life balance

❚ Inspiration/Values

❚ Enabling environment

❚ Future/Growth

opportunity

❚ Cars

❚ Clubs

❚ Physical exams

❚ Retirement

❚ Health and welfare

❚ Time off with pay

❚ Statutory programs

❚ Income replacement

❚ Stock/Equity

❚ Performance shares

❚ Annual incentive

❚ Bonus/Spot awards

❚ Base salary

❚ Hourly wage

FIGURE 3 Hay Group Total Rewards Model

Intangibles

(typically

intrinsically

valued)

Perquisites

Benefits

LTI

Short-term

variable

Base cash

Total Rewards

TotalRemuneration

Total Direct Compensation

Total Cash

Internal value

or motivation

Intangible

Rewards

where we

can assign

an objective

dollar value

Tangible


THE MANAGER’S TOTAL REWARDS TOOL KIT

The HR function has a key role to play in influencing line managers, both in

having managers realize their effect on reward programs and building managerial

confidence to act on this potential. Managers have tools available to them to reward

employees in their organizations, to drive organizational success and generate a posi-

tive return on their investment in people. Organizations achieving the highest level

of success are the ones where HR plays a direct role in influencing line managers

in knowing when and how to use these tools. Some tools include:

❚ Work climate

❚ Determining the value of work

❚ Base cash programs

❚ Variable pay programs

❚ Recognition programs

❚ Performance management

❚ Employee development.

Work Climate

Recent Hay Group research (Anderson and Zhu 2002) shows that up to 30 percent

of the variance in business results can be explained by differences in work climate

created by the manager. Work climate is influenced and generated by individual,

manager-specific behaviors and management styles that set the tone for a particular

work unit, such that employees in positive work climates are more likely to engage

in discretionary effort in support of their work unit. Managers who are attuned

to climate and who can enhance the work environment create an aspect of total

rewards that money cannot buy.

This is underscored by Scott White at Applebee’s who says, “Probably the most

important thing in this whole area of rewards is having a good boss, because they

set the right kind of work climate in the organization. We have found that many

people work here because they want a place where they feel comfortable and can

be themselves, they want a balanced life, and they want to be treated with respect

in a culture of integrity.”

One way in which HR can effectively support line managers is in making them

aware of the effect a robust work climate can have on employees and overall perfor-

mance. By education and in providing tools by which managers can assess their

current climate, managerial styles and coaching, HR can heavily influence managers’

ability to shape and improve work climate.

Determining the Value of Work

It is typically line managers who design the structure of organizations and its jobs.

Managers can also make their work areas more dynamic, move work processes

around, and be creative and flexible with their job roles as circumstances dictate.

So, it makes sense that line management is the best resource available to HR to


ensure that job documentation reflects work being performed and that matches

to external compensation surveys make sense. But, how many times does line

management confer with HR when it comes to redesigning roles (versus “just getting

the right dollars for the job”) or HR operating in a vacuum when it comes to

job leveling and market-pricing activities? Many HR functions can be more trans-

parent and inclusive with managers in job leveling and market-pricing processes.

And, managers can better partner with HR to ensure that they understand the “rules”

and processes of designing and valuing work so they can effectively communicate

and manage expectations of employees.

Base Cash Programs

While HR may be accountable for the design of base cash programs, managers

clearly and directly affect them. It is more often the manager—and not HR—who

plays the real role in ensuring that there is a clear message track to employees

regarding the rationale for base-salary increases. Given a tight linkage between the

performance-management system and the base-salary increase program in most

organizations, managers are key to ensuring proper differentiation in performance

ratings and in pay aligning with differentiated performance. HR has a role to play

in terms of counselling managers on how to do this more effectively.

Variable-Pay Programs

Previous research with WorldatWork and Loyola University Chicago on variable-

pay program effectiveness found that two of the top three improvement areas

required in an organization’s variable-pay program are more effective commu-

nication of variable-pay program objectives and creating a better line of sight

between organization objectives and individual employee accountabilities (Scott,

McMullen, Wallace and Morajda 2004). Frequently, managers don’t spend much

time ensuring the clarity of the “internal contract” with employees. This line-of-

sight opportunity is about helping employees see how their role is connected with

the organization’s performance. This is important on several fronts, but mainly

because it gives employees more meaning to their work, which drives engagement

and discretionary effort.

One example of a practical tool that HR can use to support managers in this area

is the “personal impact map,” which lays out the linkage between organizational

success drivers and individual work processes. A sample of such a map is provided

in Figure 4 on page 38 for a floor associate working in a retail drug store. Again, the

key emphasis is to show a connection between how the business achieves success

and how a particular role adds value.

The authors have audited many variable-pay programs in organizations, with a

number of them bordering on the incomprehensible. That is, these pay programs

have too many measures, measures that are too vague, overlapping measures and they

really don’t do a good job at communicating what’s important. HR’s opportunity to


work with managers can make a real impact in terms of making the variable-pay

program messages clear, which reinforces to employees where they should be

spending their time.

Recognition Programs

HR and line managers in many organizations do not leverage the motivational power

of nonmonetary reward and recognition programs. Hay Group employee opinion

data suggest that approximately one-half of employees report that their contributions

are recognized when they perform well.

Organizations are getting more serious about this, however, and approximately

85 percent of organizations report having instituted some form of recognition

program (Abrahamsen and Boswell 2003). Some are adding recognition programs

to management-development curriculum. Recognition programs are also evolving

from a traditional focus on “thank you” programs to ones that focus on employee

engagement. And some organizations are starting to emphasize the importance of

effective recognition processes in their management-development programs.

The best recognition programs are ones aligned with organizational objec-

tives, reflecting the mission, vision and values of the organizations and are an

integrated part of the rewards program, rather than stand-alone or ad-hoc plans.

This integration is typically evidenced by a formal recognition strategy (and

meaningful recognition program budgets) that is linked to the business plan and

overall HR strategy.

Some most effective recognition programs don’t financially cost the organiza-

tion because employees value simple and personal gestures from the company’s

senior leaders which recognize their efforts. Carl Smith, compensation manager at

Caterpillar Corp., agrees. “We have dozens of recognition programs across our orga-

nization. Our managers can hand out spot cash rewards. But we find nonfinancial

FIGURE 4 Personal Impact Map

❚ Wait times

❚ Employee accessibility

❚ Customer acknowledgement

❚ Aim checklist

❚ Supply on floor

❚ Easy location of products

❚ Clean store

❚ Clear aisles

❚ Faced products

❚ Sales-item signage

❚ “Hot item” visibility

❚ Individual product accountability

❚ Employee visibility

❚ Company visibility

CustomerService

Stock

Shopability

Merchandising

Community Involvement

SalesGrowth


recognition is typically the most powerful, especially when it is given by our leaders,”

he said. “We get more mileage from public recognition from a manager when it’s

done in small groups or privately. It’s inexpensive and it goes a long way” (Jensen,

McMullen and Stark 2007).

HR can play a significant role in promoting more widespread use of nonfinan-

cial recognition programs, promoting best practices and in leveraging their use

throughout the organization.

Performance Management

The manager’s effect on performance management is substantial. Managers are the

center of the performance-management process. It is the manager who must know

how to translate organizational “must-wins” into departmental “must-wins” and to

cascade goals that make sense for the department. It is the manager who ensures

that employees know what they need to do for the organization to succeed and,

as previously stated, it is the manager’s role to ensure clarity in role design and

ultimately hold employees accountable for what they do.

Perhaps the most important aspect of performance management is the ongoing

“blocking and tackling” of providing periodic feedback and constructive criticism.

This is perhaps the biggest miss and the biggest opportunity for managers. Dick Brown,

CEO of EDS, reinforces this point by saying that “a leader should be constructing

his appraisal all year long and giving his appraisal all year long. You have 20, 30, 60

opportunities a year to share your observations. If, at the end of the year, someone

is truly surprised by what you have to say, that is a failure of leadership. By failing to

provide honest feedback, leaders cheat their people by depriving them of the informa-

tion that they need to improve” (Charan 2006).

At the time to review and to reward performance, many managers tend to avoid

the difficult conversations accompanying poor performance ratings. Accordingly,

when final performance ratings are assigned for the year, the same patterns apply.

Employees need to understand and appreciate the difficulty in achieving high

ratings. Providing them with the necessary information needed to excel helps to

challenge them continually and raise the standard of excellence across the orga-

nization. HR needs to work with managers so they realize that they have a broad

range of vehicles at their disposal to reward employee performance that includes,

but isn’t limited to, base salary increases, promotions and future career develop-

ment, new project opportunities, training, public recognition, increased exposure

to senior leadership and greater empowerment in making key decisions.

HR can play a substantive role in improving how managers leverage the perfor-

mance management process. Heineken USA reinvigorated its performance calibration

process by convening meetings with managers at a given level across the organiza-

tion to discuss specific information on their employees’ competencies. According to

Amy Nenner, vice president of HR at Heineken USA, “We have an open and candid

conversation about the person, getting input from other people who may have


worked with that individual. The calibration process results in a collective rating on

each employee with which the line manager would be comfortable. If the manager

was not content with the rating, the dialogue would continue. What we didn’t do

was take away the manager’s responsibility or authority, but HR gave them a much

greater perspective” (Jensen, McMullen and Stark 2007).

HR provided Heineken’s line managers with the performance-management tools

and, perhaps more importantly, a supportive process so that each manager had

the ability to more consistently and confidently evaluate employee performance.

Many more underperformers were identified through the calibration process and

placed on performance-development plans. According to Nenner, “we’re having

much more candid and transparent conversations than we’ve ever had before, and

it’s making a positive impact on our business.”

Employee Development

While pay factors into why people leave their employers, professional and manage-

ment employees tend to be more concerned about their opportunities for personal

development and growth. The manager is the key influencer in an employee’s

personal development. Chairman and CEO of Procter and Gamble A. G. Lafley, a

perpetual Fortune Most Admired Company said, “The people we hire, and the focus

we put on their development as leaders, are critical to P&G’s ability to innovate

and compete. Nothing I do will have a more enduring impact on P&G’s long-term

success than helping to develop other leaders” (Holstein 2005).

Hay Group employee-opinion norms suggest, however, that many employees aren’t

getting the advancement-related support they seek from their managers. Less than

one-half of employees surveyed consider their managers to be doing a good job of

counselling them in their career development. To keep more of their best people,

HR in most organizations would do well to focus managers on the need to attend

continually to the development of their employees and to ensure that they are being

positioned for and placed in the roles that best align with their skills and capabilities.

The importance of nurturing and developing talent, and promoting from within is

born out by the fact that those who do this well can pay less for their talent than

other organizations (the authors’ research suggests 5 percent less). But without top-

management commitment to sensible job/role progression within the organization,

the line manager’s job will be made much more difficult. Still, HR can work with and

encourage individual managers to identify employee needs and shape work or look

for opportunities that can enhance an individual’s development.

THE MANAGER’S ROLE IN COMMUNICATIONS

Managers have a primary role to play in communicating the organization’s rewards

program. HR can help managers in ensuring that they have a clear and simple

message track for telegraphing the primary components of the rewards program

and what they are intended to achieve.


Communication is the key to ensuring that the reward program is delivering what it

was designed to do. Communications can be the “make or break” behind a successful

rewards program. But many organizations have a long way to go. Figure 5 shows that

while most organizations do have a rewards philosophy, lack of documentation and

reinforcement of that philosophy results in a poor track record of employees who

understand it (Scott, McMullen, Sperling and Wallace 2003). The reward program

can serve as a motivator only if it is understood and then accepted by employees.

Employees perform better when they know what is expected of them and how they

will be rewarded. Moreover, employees expect to be kept informed about things

affecting them and become upset and/or disengaged when this doesn’t happen.

The organization is best-served when HR does a good job at identifying and

segmenting the communication message for different employee groups. Managers

need to hear communications before employees hear them and need to have addi-

tional communication tools available to them because they are the primary resource

to answer the tough questions about the rewards program from employees. This goes

beyond a launch e-mail and/or set of PowerPoint factoids. Managers need “plain speak”

talking points and discussion protocols for one-to-one discussions with employees.

According to Liz Baldock, senior vice president, HR and learning, at American

Modern Insurance Group (AMIG), “The company’s philosophy is that the line

manager should do as much of the implementation and communication of the

compensation program as possible. When it comes to salary planning, rewards and

everything else around the total cash piece. The responsibility and accountability

for communicating and implementing is the line manager’s. HR’s role is to provide

the tools and assistance necessary to make them successful” (Jensen, McMullen and

Stark 2007).

“We give managers a standard presentation to give to employees,” added Caterpillar’s

Smith. “They get talking points with suggestions on what to advise their employees

based on their job level or type of situation. Some supplement what we give them

and others don’t make it a priority. This shows up in employee opinion surveys,”

FIGURE 5 Effectiveness of Reward Communication (Scott, Sperling, McMullen and Wallace 2003

and the Hay Group Employee Opinion Database)

“My organization has a reward philosophy” Percent of employees who understand it

True Have a written philosophy

91%

62%

Most About Half Less Than Half

35%

28%

37%


he noted. “Managers who make it a

priority usually get better results from

the employee-opinion surveys.”

Will excellent communications limit

complaints about a program that slows

compensation growth or one that

shifts guaranteed compensation to

variable pay? Probably not. But good

communications will blunt much of

the grumbling by making a sound

business case for change.

THE ROLE OF HR

Managing people effectively is hard

work, but it’s the kind of work that

rewards organizations that do it well.

Of course, HR has much work to do in

better using and preparing managers

in this regard. Because of its unique

role within the organization and with

regard to capability building, the HR

function has a critical role to play

in facilitating managers’ success and

leveraging the best management practices across the organization. HR needs to better

understand the criticality of the role that managers should play and the enhanced role

they themselves could play in helping make rewards programs successful.

Many HR and rewards professionals have an opportunity to make a difference

in their organization by engaging in a more active partnership with their line

managers and helping them become more successful by supporting their individual

development, ensuring they really understand the strategic intent of HR programs

(and not just the technical details), ensuring their involvement in the design and

refinement of rewards programs and in leveraging the best practices in reward-

program implementation across the organization.

Done well, the HR function, in concert with line management, can collectively

and positively influence how employees perceive and value total rewards in light

of this new, more comprehensive framework. ❚

RESOURCES PLUS


www.worldatwork.org



❚ “Line Managers”

❚ “Recognition Programs.”


❚ Maximizing the Impact of Recognition:

How-to Series for the HR Professional

❚ Recognition at Work: Crafting a Value-Added

Rewards Program, Second Edition

❚ Total Rewards—From Strategy to Implementation:

Step-by-Step Help for Rewards Program

Development, A Total Rewards Guidebook

❚ Communicating Total Rewards:

How-to Series for the HR Professional.



❚ C11: Performance Management—Strategy,

Design and Implementation


and Bonuses.


Abrahamsen, Lane and Greg Boswell. 2003. “Employers Turn to Recognition to Motivate Employees.” workspan,

December: 24-26.

Anderson, Krista and Guorong Zhu. 2002. “Organizational Climate Technical (OCSII) Manual.” Hay Group

McClelland Center for Research and Innovation. October.

Charan, Ram. 2006. “Conquering a Culture of Indecision.” Harvard Business Review, January: 108.

Holstein, William. 2005. “Best Companies for Leaders.” Chief Executive, November: 24.

Jensen, Doug, Tom McMullen and Mel Stark. 2007. The Manager’s Guide to Rewards. Chicago: Hay Group Inc.

McMullen, Tom and Mel Stark. 2007. “Global Line Managers Impact on Reward Program Effectiveness Study.”

Chicago: Hay Group.

Scott, K. Dow, Richard S. Sperling, Thomas D. McMullen, and Marc J. Wallace III. 2003. “Linking Compensation

Policies and Programs to Organization Effectiveness.” WorldatWork Journal, Fourth Quarter: 35-44.

Scott, K. Dow, Thomas D. McMullen, Marc J. Wallace III and Dennis Morajda, 2004. “Annual Cash Incentives for

Management and Professional Employees.” WorldatWork Journal, Fourth Quarter: 6-15.

REFERENCES

Tom McMullen ([email protected]) is a vice

president and U.S. Reward Practice leader at Hay Group,

based in Chicago. He has 20 years of HR practitioner

and consulting experience working with clients on broad

reward issues. His work focuses primarily on total rewards

and performance-program design, including rewards-

strategy development, incentive-plan design, employee

pay and job evaluation. Prior to joining Hay Group,

he was in senior compensation analyst roles with Kentucky

Fried Chicken Corp. and Humana Inc. He holds a master’s

degree in business administration and a bachelor’s

degree in mathematics from the University of Louisville.

He is co-author of the book The Manager’s Guide

to Rewards.

Mel Stark ([email protected]) is a vice presi-

dent and the Regional Reward Practice leader in the

New York Metro office of Hay Group. In his practice

role and in his personal consulting, he is focused on

adding clarity to clients’ operations through cultural

diagnostics, job analysis, work measurement, account-

ability mapping and organization design. Building

commitment in client’s employees is also stressed

through the effective implementation of holistic

reward programs. He holds a bachelor’s of arts from

The American University in Washington, D.C. and has

earned an master’s degree in business administration

from Bernard M. Baruch College and an advanced

professional certificate in organizational behavior and

development from New York University’s Graduate

School of Business Administration. He is co-author of

the book The Manager’s Guide to Rewards.

AUTHORS

What does it mean to experience work-life

balance? What is a “good” place to work? And

how have employers responded to the need

for flexibility and work-life balance? In recent decades,

analysts recognized the institutional, legal, organizational

and social forces influencing employers’ responses to the

family caregiving needs of their employees. This study

explores factors possibly influencing organizational deci-

sion makers to implement work-life policies by examining

the institutional and cultural environments in which they

exist, including an examination of how such policies

become practices and the link between implementation

and organizational culture.

BACKGROUND OF CURRENT RESEARCH

Work-life Policies

Men and women work in different environments than

previous generations, and the need to balance work and

family life remains an issue in both scholarly and popular

worlds. After several decades of responding to the labor

force’s changing face, new work-life policies and practices

have been developed. Jacobs and Gerson (2001) argue

Lessons from the Office:

The Organizational Implementation

of Work-Life Policies

Melanie A. Hulbert, Ph.D.

George Fox University

❚ Work-Life

Second Quarter 2008




that several key factors are contributing to the expanding need for family leave:

the dramatic growth of female laborforce participation, especially among married

women and mothers; the growing demand for elder care; an inadequate supply of

child care; the increasing (if still relatively small) number of men who participate

in family caregiving; and inequality in the distribution of work-life benefits across

income levels. The need for financial support during leaves from work is increas-

ingly acute for those in households at the bottom and middle layers of the income

distribution since real incomes for this group of workers stagnated or declined in

recent years (Gault and Lovell 2006). Both grassroots and political advocates in

some states are engaged in intensive advocacy to pass paid parental leave and paid

sick-leave laws.

On July 1, 2004, California implemented the first and only paid family-leave

bill in United States history. This new law provides up to six weeks of partial

pay—55 percent of weekly earnings up to a maximum of $728 per week—for

eligible employees who need time off from work to bond with a new child or to

care for a seriously ill family member. The program (funded by a payroll tax of

less than $3 per month) builds on California’s existing State Disability Insurance

(SDI) system. Milkman and Appelbaum (2004) suggest that California’s new law

is especially valuable for “the growing numbers of low-wage workers, many of

them female, who currently have limited access to employer-sponsored fringe

benefits providing paid time off (such as paid sick leave and vacation).” At this

writing (March 2008), 21 states are considering some form of paid family leave

legislation. As of March 1, 2008, a federal version has been introduced by Rep.

Pete Stark (D.-Calif.), and this version would institute a nationwide system for

paid family leave. These bills build on the California initiative with longer leave

and more robust benefits.

Many advocates of work-life balance feel that these legislative bills/programs

begin to address the severe limitations of the 1993 federal Family and Medical

Leave Act (FMLA). The FMLA was a significant advance for working families, since

it gave large numbers of employees the right to take up to 12 weeks off to care for

a new child or a sick family member. Unfortunately, the law has limitations: (1) it

applies only to workplaces of 50 or more employees, (2) it has restrictions on its

use and (3) it provides only for unpaid leave, meaning many families cannot afford

the lost income to take advantage of the program. One study (Heymann 2000)

found that families in the top quartile of the nation’s income distribution had

the most extensive employer-provided benefits, but that families in the bottom

quartile of income were significantly more likely to lack paid sick leave, paid

vacation leave, and flexibility (in regards to work schedules) than were families

in the upper three quartiles. Moreover, although women continue to shoulder

the bulk of family caregiving responsibilities, employed mothers had significantly

less access to paid sick leave and paid vacations than did employed fathers, and

mothers were also less likely than fathers to have flexible working hours.


Some argue that if “family friendly” organizations wish to remain competitive

in their economic sector, they must develop innovative compensation, retention

and benefit programs that are geared to maximizing retention rates for dual-career

family employees (Hill et al., 2006; Bianco and Bosco 2000). The objective of

business managers, in one form or another, is to maximize stakeholder wealth.

This objective can best be described in terms of return on investment. A comparison of

shareholder returns for the past five years among organizations listed in Working

Mother magazine’s 100 Best Organizations to Work for in America showed that

45 of 61 organizations yielded higher financial returns as a correlate of imple-

menting work-life policies (2006). Corporate culture is predominately a reflection

of management values. If management sends the signal that having children and

a career are acceptable, employees will be more satisfied and productive and

organizations will experience financial benefits (Brandon and Temple 2006; Gault

and Lovell 2006).

Yet, to what extent do we understand the ways in which organizational decision

makers “go about” their business when it comes to work-life policy development and

implementation? This research draws upon the internal “world” of those responsible

for creating and implementing work-life policies. How do these key players turn

policies into “realities”? Also, how does workplace culture contribute to successful

implementation and utilization? An understanding of how organizational decision

makers think about the process of implementation and the ways in which organi-

zational culture either fosters or hinders employee utilization, can move the total

rewards professional closer to educating and ensuring that the vast number of workers

and employers who stand to benefit from such policies do so.

Methods

Semistructured individual qualitative interviews were held with 52 people (12 in a

pretest study and 40 in the final study). Among the subjects, the positions included

HR managers, HR directors, vice presidents of human resources and presidents/CEOs.

Respondents worked in a wide variety of organizations and were located within many

different industries including finance and insurance; professional, health and social

services; manufacturing; retail and public administration.

SUMMARY OF FINDINGS

Policy Implementation and Work-life Policies

How do HR managers turn work-life policies into a “reality”? First, managers need

knowledge regarding work-life issues. Most respondents discussed the need to be

current on what is occurring in the media, the law, other organizational settings

and in their own organization. Without knowledge (or information regarding work-

life issues/strategies), many respondents felt they could not successfully take an

idea, present it to top leadership, offer suggestions and reasons for use, and then

turn this into an actual policy and/or practice.


Secondly, networking is a significant part of the knowledge-gaining process.

Some respondents relied on the relationships they had built through human-

resources organizations and other business professional groups. These relationships

gave some respondents a sense of ownership and legitimacy in their field and, as

they explained, enabled them to have dialogues with other HR people and access

to current work-life issues.

An HR manager for a large insurance company, Bob Klifton (all respondents have

been given a pseudonym to ensure confidentiality), suggests being a “successful” HR

person in the area of work-life issues requires contact with others in the field not only

for information but to compare what is occurring in his own organization. He said:

Really, to be successful in HR, you need to network in order to bring new

ideas to your own organizations.

How does networking contribute to the implementation process? (interviewer)

Well, I think that my responsibility at means that I have to look at

my job, not only as an insurance professional, but also as a human-resource

professional, so I have to keep in touch with both areas, and when I view my

job this way, I realize how powerful networking and staying current helps

me advocate for new things here.

Being a part of a network of people lends attention to the notion of an organi-

zation’s institutional environment. Drawing from the work of Meyer and Rowan

(1977) and DiMaggio and Powell (1983), this paper links institutional theory to the

process of policy implementation. These authors highlight the practice of mimetic

isomorphism occurring when organizations implement practices and policies in

an attempt to mimic practices and policies that have already been legitimated

within similar industries. Essentially, that is what networking was about to these

people—it was an opportunity to see what others were doing in regard to work-

life policies, to borrow ideas and methods, and to then attempt to tailor similar

programs for their organization. “Why reinvent the wheel?” was the response from

many respondents.

Similarly, this research lends support to Granovetter’s (1985) notion of social

embeddedness in organizational transactions. Granovetter argued “it is not only at

top levels that firms are connected by networks of personal relations, but at all

levels where transactions must take place.” Businesses are bound in formal and

informal ways, and economic actors construct alliances and mobilize resources

through networks of contacts. Most respondents placed heavy emphasis on the need

for interorganizational networking as a way to better implement work-life policies

and practices at their own organizations.


ACTION MAKER OR REACTOR?

The implementation process is ultimately linked to an organization’s strategic response

to institutional pressures to conform to “family friendly” laws, norms and social expec-

tations. An organization’s response is connected to the amount of power an HR

manager has been given. In some cases, leadership responsibilities had been placed

in the hands of human-resources managers. If they were given the “go ahead” from a

leader or were personally interested in promoting opportunities for work-life balance,

then these options seemed to be more likely to flourish. These people are labeled

action makers. They were an interesting subgroup in the total population because

many of them considered themselves to be experts in the realm of work-life issues.

Action makers spend time reading and researching issues, hiring consultants and

guest speakers to enter the organization, developing programs and practices, estab-

lishing a rubric of success, and following through with implementation. Following

Goodstein’s (1994) work, this paper argues that action makers are individuals who

wish to signal to the outside world that their organization is “family friendly.” Action

makers are aware of current standards of excellence and wish it to be known that

they have strategically put forth an effort to be “cutting edge” through obtaining

and retaining the best available employees.

In other organizations, the HR manager was not given a great deal of structural

authority and was therefore only able to respond as needs arose in the environ-

ment. These people are labeled reactors. Similar to Kelly and Kalev’s (2006) work,

reactors were individuals who used their discretion to grant or deny requests

for flexible working arrangements. They were people who either compromised

by partially complying with institutional pressures or avoided institutional pres-

sures through means such as concealing noncomformity and/or responding only

symbolically. Reactors were able to discuss work-life policies and practices with the

author, but had not devoted a great deal of time thinking about them, formulating

ideas and/or networking with other human-resources specialists. Unlike action

makers, reactors were unlikely to include dealing with work-life policies and prac-

tices as one of the most crucial components of their workplace responsibilities.

In fact, most of the reactors referred to the ad hoc nature of their responsiveness

to work-life issues. Often, decisions about what do to with an employee request

were made on the spot and with no formalized practice or procedure to reference.

Definitions of “family-friendly” tended to be narrow and neither seen as a practice

nor as an organizational ideal. Instead, work-life practices were merely seen as

random accommodations for employees on case-by-case bases. Policy decisions

were reported to never fully come to fruition in these organizations. These HR

managers had not been given the authority to explore work-life practices and,

therefore, were unable to accurately attach value to the outcomes.

As Laura Terry, director of HR for a dot.com company, suggests, her organization

doesn’t have a need to institute work-life policies in any formalized way. She can

make accommodations, however:


No, no. We have no—our policy handbook is such that—it’s sort of a [Whispers—

We have to really review it.] It has some folksy stuff in it. You have to be nice to

everybody. But primarily, it’s just all the same legal stuff that you see in most

employee handbooks—the FMLA, the unlawful harassment, disability, vacation

and sick time…so on. But, we do make accommodations for people if they need

them. So yeah, I mean, I guess we have statements that say we want to make

sure that you’re happy and working, but we don’t have any formal policy or

practices written down.

The study of action makers versus reactors is unique because it highlights how

organizational actors choose to either conform to or avoid institutional pressures

and expectations regarding work-life issues.

SUCCESSFUL IMPLEMENTATION

If policies are implemented, what does successful implementation look like to an HR

manager? After speaking with the action makers, the author was curious as to how

HR managers looked at the next step in implementation. The two leading responses

to the question “What does successful implementation look like to you?” were effec-

tive and appropriate communication and policy utilization. In other words, people

must know about the programs available to them, and then they must use them.

Communication through a variety of methods (intranet and e-mail communications,

verbal methods such as staff meetings, “brown bag seminars,” orientation meetings

and training weekends, written memos and handbooks) was noted as an important

factor because it ensured “full coverage.” As Kammy Sargent, an HR manager at a

manufacturing plant, argued: “It needs to be carefully and fully communicated in

order for people to really understand what is being offered.” Communicating with

employees also allows for HR managers to fully assess what employees need.

This ultimately leads to the second indication of successful implementation: policy

utilization. Todd Anderson, president of a nonprofit organization, suggests that

successful implementation can only be judged on whether or not people feel comfort-

able using the practices available to them. In his perception, “There is no point even

offering work-life programs if you aren’t going to let people use them.” In this sense,

Anderson is speaking about the culture of his organization and the extent to which

it legitimizes work-life balance. In his organization, he employs approximately 50

people, and of those 50 people, he suggests that close to one-half use some type

of work-life policy. He sees this as a positive indication of implementation.

The analysis of policy usage is at the core of work-life policy implementation.

If employees are unable, or are not encouraged, to use what is available to them, then

the decision to offer these policies and the process of implementation are not topics

worthy of much research. By documenting what it means to take a decision to offer

these programs, turn them into a reality and then allow their use, an organization comes

closer to envisioning what family life-oriented organizations are capable of achieving.


Workplace Culture

Policy implementation and utilization are ultimately linked to workplace culture.

This research revealed that the uneven implementation of work-life policies across

organizational departments was connected to the type and kind of workplace

culture. Workplace culture can be defined as the shared assumptions, beliefs and

values regarding the extent to which an organization supports and values the integra-

tion of employees’ work and family lives. This definition is consistent with Schein’s

(1985) and Denison’s (1996) definitions of organizational culture as the deep struc-

ture of organizations, which is rooted in values, beliefs, and assumptions held by

organizational members (Denison 1996). Much research on workplace culture has

studied the influence of work-life culture on employee-level benefits utilization,

career consequences associated with using work-life benefits and levels of work-

life conflict (Mathisen and Einarsen 2004; Rose and Griffin 2002). However, little

is known regarding how upper management, specifically HR managers and other

leaders, believe these cultures either impede or encourage the use and implemen-

tation of such policies.

Most respondents agreed that organizational culture is shaped by the leaders and

decision makers of the business, whose personal values and experiences become

reflected in company values. The reports that the respondents gave ultimately shed

light on the cultural work that leaders have chosen to promote their businesses as

family-friendly in an attempt to legitimize themselves in their particular industry.

“This is what I think my employer feels is a responsible thing to do” was a common

response given when describing the effort that their “boss” took in promoting and

creating work-life policies. If an organization had a leader who bought into the

legitimacy and benefits of a having a family-friendly environment, it was more

likely to occur; whereas, a reluctant or pessimistic leader could deter an organiza-

tion from developing “real” policies and practices that people felt free to use.

In the few cases when the author was able to—on a face-to-face basis—talk with

leaders or an HR person who was in a leadership position, the author learned a

great deal about how the “tone” of an organization can be set by those at the top.

One of these leaders, during the conversation, described his thoughts on workplace

culture and the work-life atmosphere at his publishing company:

Under our prior leadership, the director felt that if you worked 8:30 to 4:45

and you took your lunch, then you just weren’t committed. I feel that I am

very different than he was.

And how so? (interviewer)

That I have small children and I really buy into the advantages of work-

life policies. I want to run a good business, and the way to do that is to

let my people do the best they can when they are here…but that can only


happen if they are able to take care of their families. I have a real problem

with business leaders who put the bottom line before their employees.

What they don’t realize is that the bottom line is only a result of satisfied

and “unstressed” employees.

Workplace cultures are very complex. Cultures cannot be simply seen or

witnessed. They cannot be pictured exactly, and they are not something that

someone can accurately describe in an hour-long interview. No research on work-

place culture is either exact or accurate. While a company undoubtedly has a

universal culture affecting all employees, different departments with different

managers form subcultures as well. Even within a particular department, subcul-

tures may also exist. However, workplace culture—in all its complexity—frames

most of what is going on within an organization.

MANAGERIAL BUY-IN AND RESISTANCE

Even though what happens in the top management is important, how that

message infiltrated down to the organization’s middle management is signifi-

cant. As mentioned, in some organizations it was reported both that the leaders

of the organization bought into a “real” family friendliness and that the lower

management teams and human-resources personnel took that vision and actively

produced a culture where flexibility for, and acceptance of, work-life issues had

firmly been legitimated. But other organizations—with similar “progressive-type”

leaders—had resistant managers who either overtly or covertly resisted the legiti-

macy of these ideas. In these organizations, the uneven implementation of policies

across departments prevented any successful outcomes. In some of these cases,

the HR manager would talk about having to “coach” or “train” these managers to

think in new ways. These HR managers had to take on the role of “culture cops”

in that they had to work with resistant managers who seemed unwilling or even

unable to promote a healthy work-life balance for their employees because they

were not used to managing people in nontraditional arrangements.

Even though dealing with resistance was not a dominant theme in this study,

it was an issue mentioned enough to discuss. These stories highlight the impor-

tance of looking at the factors potentially deterring the successful implementation

of work-life policies. When establishing a workplace culture of family friendliness,

if human-resources managers run up against resistance, then their job becomes

one of enforcing culture—both literally and symbolically. Just as some HR managers

deal with the daily logistics of an employee’s use of work-life policies, some must

ensure that midlevel managers are not getting in the way of those activities (Kelly

and Kalev 2006). Up to this point, the literature on managerial resistance does not

address the strategies that organizational players are taking to deal with resistance.

This research provides insight into this topic and highlights the need for further

research into managerial policy resistance.


FUTURE DIRECTIONS

This research revealed that one

potential key to the successful imple-

mentation of work-life policies is an

organization that has “bought into”

the need for flexibility and work-life

balance. But of real interest was the

resistance that many respondents

discussed. Why are managers resis-

tant to change?

What is the root of resistance?

Several suggestions were offered in

this research. For example, the diffu-

sion of work-life policies often is

limited because these practices chal-

lenge firmly institutionalized practices,

beliefs and rationales. The assumption

that organizations should not be

involved in family life, that the worlds

of work and home are separate, and that work-life conflict is seen as a personal

issue were salient themes in this research.

Resistance could also be seen as a result of fearing flexibility in the workplace.

As research has shown, the kinds of skills necessary to manage a workforce

which is increasingly diverse in cultural origin and lifestyle are different from

those effective in the past when workers were more homogeneous (Glass 2000).

Organizations need to select and train individuals who value diversity, who are

flexible, and who can help workers cope with work and personal-life conflicts. But

where does this training really begin? If flexibility is being proposed as “a critical

organizational tool” (Gault & Lovell 2006; Glass 2000), then it becomes essential

to see if flexibility is being incorporated into the rhetoric, training and education

of future human-resources managers.

Popular discussions of corporate family policies focus on employers’ desire to

attract, retain and motivate their workers. Work-life specialists, business allies and

federal officials developed and repeated these accounts during the past 20 years.

Despite the prevalence of the “business case” that has been built around these

policies, they remain not well-institutionalized in American organizations. These

findings suggest the need to reconsider the amount of support and discretion that

HR managers are given in implementing work-life policies.

RESOURCES PLUS


www.worldatwork.org

Type in this search phrase on the search line:

❚ “Work-life balance.”


❚ Work-Life Effectiveness: Bottom-Line

Strategies for Today’s Workplace

❚ Life at Work: Beyond Compensation

and Benefits.


❚ W1: Introduction to Work-Life Effectiveness—

Successful Work-Life Programs to Attract,

Motivate and Retain Employees

❚ W2: The Flexible Workplace—

Strategies for Your Organization

❚ W4: Organizational Culture Change—

A Work-Life Perspective.


CONCLUSION

The optimal solution is that work and family issues would not need any designated

resources—that human-resources managers and other key players would integrate

work-life balance so much in the culture that they would become a way of life,

and those manager roles would no longer be necessary. Ideally, each person in the

company would automatically consider flexibility, balance and diversity. Policy people

would not need to consult with a work-life manager because they would automatically

take work-life needs into account.

Work-life issues are not fads; rather they reflect the inevitable current and future

flux in workforce demographics, attitudes and needs. The availability and use of such

policies reflect organizational responsiveness and vitality. Although no easy answers

exist for implementing work-life policies and programs in a manner promoting true

culture change, the author remains optimistic that a growing number of organiza-

tions will achieve this vision. ❚

Melanie A. Hulbert, Ph.D. is an assistant professor of sociology at George Fox University. She holds a bachelor

of arts from Western Washington University, a master’s degree in women’s studies from the University at Albany,

State University of New York and a Ph.D. from the University at Albany. She specializes in the sociology of work

and gender issues and family and has an interest in race/ethnicity themes. She received the Paul Meadow’s

Teaching Award from the University at Albany.

AUTHOR

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Forum, Vol. 3, No. 2: 79-110.

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Abesenteeism, Retention, and Productivity of Workers: Timely Evidence from Prior Data.” Australian Journal

of Social Issues, Vol. 42, No. 4: 448-460.

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A native’s point of view on a decade of paradigm wars.” Academy of Management Review, July: 619-654.

DiMaggio, Paul J. and Walter W. Powell. 1983. “The Iron Cage Revisited: Institutional Isomorphism and Collective

Rationality in Organizational Fields.” American Sociological Review, April: 147-160.

Gault, Barbara and Vicky Lovell. 2006. “The Costs and Benefits of Policies to Advance Work/Life Integration.”

American Behavioral Scientist, May: 1,152-1,164.

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August: 289-313.

Goodstein, Jerry D. 1994. “Institutional Pressures and Strategic Responsiveness: Employer Involvement in Work-

Family Issues.” Academy of Management Journal, April: 350-382.

Granovetter, Mark. 1985. “Economic Action and Social Structure: The Problem of Embeddedness.” American

Journal of Sociology, November: 481-510.

Heymann, Jody. 2000. The Widening Gap: Why America’s Working Families Are in Jeopardy—and What Can Be

Done about It. New York: Basic Books.

Hill, Jeffery, Alan J. Hawkins, Maria Ferris and Michelle Weitzman. 2001. “Finding an Extra Day a Week: The Positive

Influence of Perceived Job Flexibility on Work and Family Life Balance.” Family Relations, January: 49-54.

Jacobs, Jerry A. and Kathleen Gerson. 2001. The Time Divide: Work, Family, and Gender Inequality. Cambridge:

Harvard University Press.

REFERENCES


Kelly, Erin and Alexandra Kalev. 2006. “Managing Flexible Work Arrangements in US Organizations: Formalized

Discretion or ‘A Right to Ask.’” Socio-Economic Review, Vol. 4, Issue 3: 379-416.

Mathisen, Gro Ellen and Stale Einarsen. 2004. “A Review of Instruments Assessing Creative and Innovative

Environments Within Organizations.” Creative Research Journal, Vol.16, No. 1: 119-140.

Milkman, Roth and Eileen Applebaum. 2004. “Paid Family Leave in California: New Research Findings.” The State

of California Labor 2004. Berkeley: University of California Press.

Meyer, John W. and Bruce Rowan. 1977. “Institutionalized Organizations: Formal Structure as Myth and

Ceremony.” American Journal of Sociology, September: 340-363.

Rose, D. M., and M. Griffin. 2002. “High Performance Work Systems, HR practices and High Involvement: A group

level analysis.” Academy of Management, Conference 2002, Denver.

Schein, Edgar H. 1985. Organizational Culture and Leadership: A Dynamic View. San Francisco: Jossey-Bass.

Working Mother. 2006. “The 100 Best Companies for Working Mothers.” October.

The Medicare Prescription

Drug Plan: A Model of Complexity

and Ineffective Communication

The Medicare Part D Prescription Drug Plan provides

a rich source of information on how not to design

and communicate a benefits plan. While many

people are familiar with the gap in the drug plan’s

coverage, or “donut hole,” which caught seniors by

surprise, other plan aspects and its launch in 2006 also

caused considerable consternation.

This paper examines the plan’s basic provisions, the

number and types of drug plans being offered and enroll-

ment tools to provide an in-depth look at the issues

challenging seniors and offer valuable lessons for benefits

professionals.

An understanding of the plan will be of significant value

to total rewards professionals when they are deciding

whether to replace their company’s prescription drug plan

for retirees with the Medicare plan, and when explaining

its complex maze of benefits and costs to seniors.

REACTIONS TO THE PLAN

A sample of reactions to the plan’s design from a variety

of sources follows:

❚ Consumer Reports: “Confounding hodgepodge of

offerings” (2006)

Benefits ❚

Frank Giancola

Second Quarter 2008




❚ Money: “Masterpiece of confusion…complete with a decoder Web site”

(Andrews and McGirt 2005)

❚ The Wall Street Journal: “Twisted and complicated design” (Wessel 2006).

MEDICARE PART D

Prescription drug coverage is offered to everyone receiving Medicare, regardless of

how much they earn, where they live and why they are receiving Medicare. This is

referred to as Part D of Medicare coverage and is administered by the Centers for

Medicare & Medicaid Services (CMS). Except for certain low-income groups, partici-

pation in the plan is voluntary and requires the payment of monthly premiums,

although the cost is largely subsidized by the federal government.

There are two ways to receive coverage. Medicare recipients can join a stand-alone

Medicare Prescription Drug Plan (PDP) or a Medicare managed-care medical plan, such

as an HMO or a PPO, which includes Medicare Part D coverage as part of the plan.

Private organizations offer the drug coverage, instead of the federal government, as

under Medicare’s traditional medical coverage. All plans must be approved by the CMS

and meet certain criteria, such as offering certain types of drugs and meeting cost-

sharing parameters. Nevertheless, providers have considerable latitude in designing

their plans, which is the source of many issues for seniors.

NUMBER OF PLANS

According to studies by the Kaiser Family Foundation, 2,642 PDPs were offered in

2007 by 1,167 organizations, from nationally known insurers to regional companies.

Seniors in each state select from 45 to 66 plans (Kaiser Family Foundation 2007a).

A 2006 survey of seniors found that 60 percent believe CMS should select a handful

of plans to simplify the selection process (Kaiser Family Foundation/Harvard School

of Public Health 2006). A 2005 CMS survey indicates that 30 percent of private-sector

employers offer more than one health-insurance plan for employees, one indica-

tion of the overabundance of drug-plan options (Centers for Medicare & Medicaid

Services 2007a).

THE STANDARD PLAN

PDPs must provide the equivalent or better value to participants as the “standard

plan.” This plan reflects mandated cost-sharing parameters and not necessarily a

user-friendly plan design.

The following is the standard plan outline for 2008:

Yearly deductible—$275

❚ After the deductible has been met, participants pay 25 percent of costs until their

expenses and plan costs reach $2,510.

❚ Participants pay 100 percent of costs until their expenses reach $4,050. This is the

“donut hole.”


❚ For the rest of the plan year, participants pay the greater of 5 percent of drug

costs or co-pays of $2.25 for generics and $5.60 for brand-name drugs. (Centers

for Medicare & Medicaid Services 2007b).

Providers have some freedom to use different cost-sharing arrangements when

designing their offerings. Only 12 percent adhere to the standard plan structure.

For example, plans can eliminate the deductible, but cannot offer a higher one,

and they may use fixed dollar co-payments instead of coinsurance percents to

share costs with participants. The annual catastrophic limit on participant expenses

cannot be modified.

PLAN DESIGN

Plan design presents a formidable challenge for Medicare recipients because there

is no universal design, and plan features change frequently. According to the Kaiser

Family Foundation, the 10 PDPs with the highest enrollments in 2007 use these

elements of the standard plan, as follows:

❚ Five use the standard deductible; five use no deductible.

❚ Two use the standard 25 percent coinsurance for all drugs.

❚ Eight use a combination of coinsurance and co-pays.

❚ Three use three tiers of co-pays; five use four tiers.

❚ Eight made changes to their tiers in 2007.

The lack of standardization means that the same drug can be in different tiers,

with different co-pays and coinsurance, in the various plans (Hoadley, Hargrave,

Merrell, Cubanski and Neuman 2006).

Gap Coverage

The gap in coverage, or “donut hole,” is a major stumbling block for many seniors,

who are surprised when their coverage stops while their premium continues.

In 2007, 71 percent of the plans had no gap coverage; 27 percent covered only

generic drugs; and 2 percent covered brand-name and generic drugs while in the

gap. The number of plans with gap coverage increased to 538 in 2007 from 220 in

2006, likely due in part to federal guidance that requires enhanced gap coverage for

providers offering three Medicare drug plans (Hoadley, Hargrave, Merrell, Cubanski

and Neuman 2006).

Cost-Sharing Arrangement

The cost-sharing arrangements of many PDPs are complex and are unlike those

found in employer-provided drug and medical plans.

First, most employer prescription drug plans have no deductible, coinsurance

amount and threshold for out-of-pocket expenses. They simply provide three or

four tiers of co-pays, rather than coinsurance amounts, for various types of drugs

(Employee Benefits Research Institute 2007).


Second, Part D’s three-step cost-sharing format differs from the three-step format

commonly found in medical plans. These plans have a deductible and use a

coinsurance amount, typically 20 percent, until an annual out-of-pocket amount

is reached, at which point the plan pays 100 percent for covered services. Many

PDPs have a gap in coverage, and all require cost sharing in the form of small

co-pays or coinsurance amounts after reaching the annual limit, which is referred

to as a “catastrophic limit.”

In addition, the lower threshold of the gap is attained when the total of participant

expenses and plan costs reach a specific dollar figure. The counting of both partici-

pant expenses and plan costs is atypical for medical plan cost-sharing arrangements,

which only count participant expenses. Thus, participants reach the gap sooner than

they might expect. The upper limit of the gap, however, is based only on participants’

out-of-pocket expenses, which adds complexity.

Changing Dollar Amounts

PDPs are highly detailed and dynamic, as reflected in the annually changing dollar

amounts, including the deductible, lower and upper boundaries of the gap in

coverage (the size of the gap has increased each year by about $100) and co-pays

after reaching the annual limit. It is unusual for employer-provided drug and medical

plans to change similar dollar amounts annually.

FORMULARY

One key consideration for seniors is whether, and to what extent, their medications

are covered by a plan. This is not a simple task since there is no standard list of

covered drugs, or “formulary,” that all plans must offer. To select a plan meeting their

needs, seniors must call those in their area, or use Medicare’s Web-based tools, to

find ones that cover their medications and to determine their co-pays, coinsurance

amounts, utilization requirements (e.g., trying cheaper drugs first) and pharmacy

locations. The formulary can change each year, so participants must repeat the

process annually to find the best plan.

A 2006 Kaiser Family Foundation study of 35 national PDPs found substantial

variation in plan formularies. For example, the plans cover from 64 percent to 97

percent of the most commonly prescribed drugs for seniors and only 51 percent of

the top 10 prescribed brand-name drugs. The study confirms the complexity of the

Medicare marketplace and the difficulty seniors must deal with in making compari-

sons (Hoadley, Hargrave, Cubanski and Neuman 2006).

COMPLEXITY

In one national survey, 73 percent of seniors, 91 percent of pharmacists and 92

percent of doctors stated the plan is too complicated. Thirty-six percent of seniors

plan to stay in their current plan because it is too much trouble to compare plans,

and 14 percent were unaware they could switch plans (Kaiser Family Foundation


and the Harvard School of Public Health 2006). Kaiser researchers have concluded

that complexity poses a challenge to seniors and, without careful consideration of

the differences in plan-design details, they could find themselves paying hundreds,

if not thousands, of dollars more for their prescriptions (Hoadley, Hargrave, Cubanski

and Neuman 2006).

COMMUNICATIONS

In 2006, Congress asked the U.S. Government Accountability Office (GAO) to review

the effectiveness of Medicare Part D communication tools that launched the program

(United States Government Accountability Office 2006). A summary of the GAO

findings and this author’s comments follow.

Handbook

The primary document that informs seniors about Medicare Part D is the annual

handbook, Medicare & You. The GAO found that it describes the plan completely

and accurately, although serious weaknesses were noted. First, about 40 percent of

seniors read at or below the fifth-grade level, so many would have difficulty under-

standing a document at the seventh-grade to post-college reading level.

Second, due to a lack of clarity, none of the 11 tested participants and only

two of the five advisors were able to complete the task of computing their total

projected out-of-pocket expenses for the described standard plan. Third, the hand-

book failed to indicate that few plans offer the same coverage as the standard plan

and that people should be prepared to compare plans with different premiums,

co-pays and covered drugs.

The GAO report also noted that insufficient information was provided about

the cumulative cost penalty for not enrolling when first eligible (1 percent of

the monthly premium for each month of delay). Readers were also left with the

impression that exceptions to a plan’s list of covered drugs would be granted if

a doctor simply made an exception request, even though the final decision rests

solely with the plan.

This author also notes that the handbook contributed to the confusion about

the “donut hole,” which is part of the three-step cost-sharing arrangement. First,

cost sharing was not given prominence in the handbook—it was covered in one

paragraph on page 13 of the 15-page Part D description, and no warning was given

about a gap in coverage. Second, the cost-sharing formula for the standard plan was

described inaccurately and without an example, which is essential for plan compre-

hension. All areas mentioned in this paper’s “Handbook” section are improved in

the 2007 edition of the handbook.

Help Line

Responses to the 500 calls placed to the Medicare Part D help line were frequently

accurate and complete, but 33 percent were inaccurate, incomplete, inappropriate,


and sometimes involved an extensive wait time (75 percent were answered in less

than five minutes). For example, when help-line employees were asked to identify

the lowest cost plan for specific drugs, the accuracy rate of their response was 41

percent, and 35 percent of callers were told the question could only be answered

with personal identifying information, when none is required.

Web Site

The GAO found the Medicare Part D Web site hard to use because its tools,

such as the drug-plan finder, were complicated and at times difficult to navigate.

The drug-plan finder is a helpful tool for determining which plans cover drugs

in a given geographical area, as well as drug utilization requirements, pharmacy

locations and drug costs.

The GAO’s evaluation of 137 usability features of the Web site found that 70 percent

were likely to cause confusion. The seven test participants were able to proceed

only halfway through 34 user tests. Based on the author’s experience with the site,

computer literacy is needed to use it successfully.

FINAL THOUGHTS

Strategic Importance

HR professionals may overlook Part D’s strategic importance to their organiza-

tion because it is a government program for retirees. There is a tendency to focus

on ideas that have greater “buzz” and resonance with top management. Recent

McKinsey & Co. surveys found that line managers were critical of HR for focusing

too much attention on senior managers and not enough on the needs of the front

line (Guthridge, Komm and Lawson 2008).

McKinsey researchers also have observed a decline in the past 10 years in HR’s

influence over business strategy and its lack of deep business knowledge. HR profes-

sionals must be aware of these issues and give sufficient attention to Part D’s

potential impact on the bottom line, as described below.

In 2007, 33 percent of employers with more than 200 employees offered retiree

health-care benefits, the majority of which include prescription drug coverage

(Kaiser Family Foundation and Hewitt Associates 2004; Kaiser Family Foundation

2007b). Prescription drugs accounted for 40 percent to 60 percent of health-

care costs for retirees over age 65 (about $2,000 each year) in 2000 and were

projected to represent a greater percentage by the end of the decade (Kaiser Family

Foundation 2000). Many companies welcome the opportunity to shift health-care

expenditures to government plans, such as Medicare Part D, to reduce costs and

to be able to devote greater resources to the main business.

For example, when Part D became available, Ford Motor Co. and Chrysler Corp.

terminated their medical, dental and drug plans for Medicare-eligible salaried retirees

to reduce administrative costs and benefits expenses. They now provide retirees

with a tax-free health-reimbursement account, funded annually at $1,800 per person.


This figure allows the company to

achieve a substantial cost savings and

covers retirees’ expenses for purchasing

comparable coverage from Medicare

and private insurance companies.

A deep understanding of the benefits

and costs of Part D is necessary to

realize both goals.

Finally, Part D should not be viewed

only as as a retiree benefit, since it

also applies to employees who work

past age 65. These employees are

being retained in greater numbers,

if their skills are difficult to replace,

by forward-thinking companies

(Morton 2005). To reduce health-care

costs, employers should consider

reimbursing them for the cost of

joining a Medicare drug plan if they

opt out of the company plan.

Helping Seniors

Because of plan complexity, a multitude of options and inadequate communica-

tions, the task of selecting the best PDP would be a difficult one for most people

with a high-school education, personal computer skills and Internet access. Since

the majority of seniors are less well-educated and not online, many would not be

up to the task (Kaiser Family Foundation 2005). They would need the assistance of

someone with those abilities and access to make a good decision, and they would

be aided greatly by clear, complete and easy-to-use communication tools.

HR professionals can assist retirees by preparing enrollment communications

that supplement CMS materials and by arranging meetings to explain and answer

questions about the plan. They also can locate and refer them to agencies that

offer personal assistance in selecting a Medicare drug plan, such as a state health-

insurance assistance program.

Too Many Choices

Many seniors probably identify plans that cover their current medications and select

the one with convenient pharmacies and the most affordable premium, without

doing the cost-sharing calculations. And some probably base their decision solely

on the plan’s low premium.

Hewitt Associates reports that 70 percent of the 6 million employees in its 2006

health-care open enrollment did not make an active decision on a health-care

RESOURCES PLUS


www.worldatwork.org



❚ “Medicare Part D”

❚ “Prescription Drug Plan.”


❚ Benefits Compliance: An Overview

for the HR Professional.


❚ B1: Fundamentals of Employee Benefits

Programs

❚ B3: Health Care and Insurance Plans—

Design and Management

❚ B3A: Health Care and Insurance Plans—

Financial Management.


plan and were placed in default coverage. One explanation given by Hewitt is

that the more decisions people are asked to make, the less likely they are to make

them (Peterson and Trout 2007). In an open enrollment for health-care plans,

employees have far fewer options than the 50 or so that seniors typically face. For

seniors, the “default option” might be the plan with the lowest premium, since

many are of limited means and without drug coverage.

“Low-Balling” Seniors

In 2006, the first year drug plans were offered, the default option apparently was

easy to identify. The Wall Street Journal reports that one of the two companies with

40 percent of the market share gained its share, in large measure, based on low

premiums. This company offered an average monthly premium for its basic plan

of $9.51, when the Medicare handbook states such plans have a premium of about

$32 per month. In 2008, the company’s premium increased to $25.56. The other

company with a leading market share recently increased its monthly premium on

a low-cost plan by 87 percent to $27 (Zang 2007). Basic plans were selected by 83

percent of enrollees.

A Better Alternative

Leaving seniors subject to the forces of the marketplace resulted in money being

wasted, unexpected gaps in coverage and anxiety about benefits and costs.

One frequently mentioned alternative to the present arrangement calls for CMS

to operate a simple universal plan and to negotiate drug prices with the pharma-

ceutical companies (rather than leaving it to the drug-plan providers), an option

favored by 81 percent of seniors.

This option could have achieved the same or greater cost savings and would have

avoided the burden placed on seniors. One study found that drug prices under

Medicare Part D are considerably higher than the prices negotiated by the Department

of Veterans Affairs (VA) for military veterans. For the 20 drugs most frequently

prescribed to seniors, VA prices were consistently lower than the lowest base price

of any Part D drug plan. The median difference in price for a year of treatment was

48.2 percent, or $260 (FamiliesUSA 2008). This option also would have precluded the

extensive government bureaucracy to regulate the operations of the drug providers

and required a simple communications program. ❚


Andrews, Michelle and Ellen McGirt. 2005. “Mastering the Medicare Machine.” Money, November: 158-164.

Centers for Medicare & Medicaid Services. 2007a. Medical Expenditure Panel Survey. 2005. http://www.meps.

ahrq.gov/mepsweb/data_stats/summ_tables/insr/national/series_1/2005/tia2d.htm. Viewed: Oct.17.

Centers for Medicare & Medicaid Services. 2007b. Medicare & You. 2008. 1-117.

Consumer Reports. 2006. “What you need to know about Medicare Part D.” February: 34-36.

Employee Benefits Research Institute. 2007. Fundamentals of Employee Benefit Programs. http://www.ebri.org/

publications/books/index.cfm?fa=fundamentals.Viewed: Oct. 17.

FamiliesUSA. 2008. “Falling Short: Medicare Prescription Drug Plans Offer Meager Savings.” http://www.

families usa.org/assets/pdfs/PDP-vs-VA-prices-special-report.pdf. Viewed: Feb. 29.

Guthridge, Matthew, Asmus B. Komm and Emily Lawson. 2008. “Making talent a strategic priority.” The McKinsey

Quarterly, Issue 1: 48-59.

Hoadley, Jack, Elizabeth Hargrave, Juliette Cubanski and Tricia Neuman. 2006. “An In-Depth Examination of

Formularies and Other Features of Medicare Drug Plans.” Kaiser Family Foundation. April: 1-32.

Hoadley, Jack, Elizabeth Hargrave, Katie Merrell, Juliette Cubansk and Tricia Neuman. 2006. “Benefit Design and

Formularies of Medicare Drug Plans: A Comparison of 2006 and 2007 Offerings.” Kaiser Family Foundation.

November: 1-33.

Kaiser Family Foundation. 2000. “The Implications of Medicare Prescription Drug Proposals for Employers and

Retirees.” July: 1-99.

Kaiser Family Foundation. 2005. “Online Health Information Poised to Become Important Resource for Seniors, But

Not There Yet.” http://www.kff.org/entmedia/entmedia011205nr.cfm?RenderForPrint=1. Viewed: Mar. 1, 2008.

Kaiser Family Foundation. 2007a. Statehealthfacts.org. Viewed: Oct. 17.

Kaiser Family Foundation. 2007b. “Employer Health Benefits. 2007 Summary of Findings.” http://www.kff.org/

insurance/7672/upload/Summary-of-Findings-EHBS-2007.pdf. Viewed: Mar. 22, 2008.

Kaiser Family Foundation/Harvard School of Public Health. 2006. Seniors and the Medicare Prescription Drug

Benefit. December: 1-19.

Kaiser Family Foundation and Hewitt Associates. 2004. Retiree Health Benefits: Now and in the Future. 1-87.

Morton, Lynne. 2005. “Managing the Mature Workforce-Report # 1369.” The Conference Board. July: 1-27.

Peterson, E. Scott and Tricia Trout. 2007. “Improving Employees’ Benefits Decisions—A Holistic Approach.”

Benefits Quarterly, First Quarter: 11-15.

United States Government Accountability Office. 2006. “Medicare Communications to Beneficiaries on the

Prescription Drug Benefit Could Be Improved.” May: 1-81.

Wessel, David. 2006. “Once Unloved, Medicare’s Prescription-Drug Program Defies Critics, but Issues Remain.”

The Wall Street Journal, Dec. 7: A.2.

Zang, Jane. 2007. “Medicare Premiums On Drugs Set to Rise.” The Wall Street Journal, Oct. 3: D.9.

REFERENCES

Frank Giancola ([email protected]) has more than 40 years of HR experience; 25 years with Ford

Motor Co., primarily in various compensation and benefits positions, and 23 years with the active and reserve

components of the U.S. Air Force as a personnel officer. Giancola has taught HR and compensation-management

courses at several colleges. He graduated from the University of Michigan with a bachelor’s degree in psychology-

sociology and received a master’s degree in business administration and a master’s degree of arts in industrial

relations from Wayne State University in Detroit.

AUTHOR

P ay for performance is the mantra being chanted

from the board of directors down to the first-line

supervisor. But what is the definition of “pay?”

Whose performance? What is the definition of “perfor-

mance?” How will it be measured?

It is critical that the pay planner answer these questions

when creating a “pay-for-performance” process (not a

program). Programs have limited lives; processes continue

until changed. This paper reviews each of these questions:

❚ What pay?

❚ Whose performance?

❚ What performance?

❚ How will performance be measured?

WHAT PAY?

“Pay” in a pay-for-performance program is usually defined

as short- and long-term incentives, although some are

still trying to apply it to salary. The problem with tradi-

tional salary programs is that they are rarely reduced.

However, users of lump-sum merit programs can employ

performance criteria since the payment is not built into

the base salary. Further, it is difficult to imagine how

What Pay for Performance

Should Measure

Bruce Ellig

❚ Compensation

Second Quarter 2008




employee benefits can be included in the pay-for-performance definition. Except

where company profit sharing can result in an increased company contribution

to the defined contribution plan, employee benefits are typically age and years of

service related. That leaves the short-term and long-term incentive plans as the most

common pay elements employing performance to determine amount.

Short-term incentives by definition have a measurement period of one year or

less. The most common is the organization’s annual business year. The long-term

incentive plan is a measurement period typically of three to five years, except

for stock-option and stock-appreciation rights (traditionally extended for 10 years).

However, with the requirement to take a charge of earnings under FAS 123(R), some

are moving to shorter-term options (such as five years). Long-term incentives may

be paid in cash and/or stock, as are short-term incentives, but with the latter, cash

is the most common form of payment.

WHOSE PERFORMANCE?

This question breaks into two questions.

❚ Who is included in being eligible for a pay-for-performance payment?

❚ And whose performance is measured for that payment?

Is it performance of an individual or a group? If it’s a group, is it a small unit—such

as a team—or a larger portion of the company, or is it the entire company?

Traditionally, those covered by incentive systems have been at the organization’s

two extremes. The CEO and other executives were covered by both short- and

long-term incentive plans. In the factory, many workers were covered under short-

term incentives that measured output per piece produced during an hour or

a day. As time progressed, companies extended the long-term incentive of stock

options down through the organization. But this has been curtailed with the earn-

ings charge required under FAS 123(R). However, a trend that continued is the

extension of the short-term incentive plan throughout the organization. In some

cases, it has replaced the price-rate system, but in most situations, it has included

employees who were not participants in any incentive system. Suffice it to say that

the best-practices companies are ensuring all employees are covered in at least

one type of short-term and long-term pay-for-performance plan.

Although situations exist where only performance of the individual or only of the

group may be appropriate, it can be argued that the most appropriate assessment is

a combination of the two. The definition of “group” varies. At the organization’s top,

the group would be performance of the entire company. But as one drifts through

the organization, the various subdivisions should be considered. Thus, at the level

immediately below the CEO, the unit head might have his/her own unit performance

and the company performance considered in addition to his/her own personal

performance. Including company performance in all sublevels of the organization

is done when it is believed appropriate that individuals understand they are part of

a whole, and that it is the whole that is assessed by shareholders.


WHAT PERFORMANCE?

The definition of “what performance” flows downstream in an organization. It starts

with the board of directors, who identify the CEO’s key performance-success factors.

These are the key components of the company’s strategic plan.

The measurements for the CEO are typically set by the board of directors and

heavily influenced by shareholder input. The measurements for the first level below

the CEO are set by the CEO and reflect an allocation of his/her objectives, in addi-

tion to those that the CEO and subordinate also believe appropriate. This breakup

and allocation of objectives continues to cascade through the organization. If done

effectively, at lower levels, an employee can see his or her own objectives contribute

to the top organizational objectives. This assessment is referred to as line of sight—

in other words, a straight-line relationship of aggregating performance going up the

organization, leading to organizationwide objectives.

Performance objectives typically are set in relation to past performance, future

expectations and/or performance of comparable companies. Historical (or look-

back) targets are improvement-focused in relation to a defined base. Future (or

look-forward) expectations are described in quantitative ways, perhaps with a look

at past performance. Peer performance (or look-around) is focused on outper-

forming organizations in one’s own industry.

Typically, the desired performance level is called the target. A predetermined range

around it establishes a threshold and a maximum. The threshold is the minimum

level of performance below which no incentive payment will be made; the maximum

is the upper limit beyond which no credit will be given for accomplishment.

These three levels of performance are shown in Figure 1, along with their respec-

tive incentive awards. It is important that whatever is being identified can be

measured and that the outcomes are at least influenced, if not totally controlled, by

the person being rated. It is equally important to identify those factors outside of the

rated person’s control and their degree of significance. If setting targets for different

measurements and for different parts of the business, the degree of difficulty should

be included. These are called stretch targets and should be of equal difficulty rather

than equal in absolute or percentage improvements.

FIGURE 1 Threshold, Target and Maximum Performance and Bonus Opportunities

Maximum Award

Target Award

Threshold

Threshold Target Maximum Performance Performance Performance


If more than one measurement is used, the question is: “What weight should be

given to each?”

The answer is: It depends.

If each is of equal importance, then each is of equal weight. That is the first step in

the weighting process. If they are of equal weight, stop. If not, attempt to determine

the rough order of magnitude. If, for example, there were four objectives, it might be

determined that “A” was four times as important as “D,” two times more important

than “C,” but only slightly more important than “B.” However, if “B” were viewed

as three times as important as “D,” relative weightings would be as follows: “A”

(40 percent), “B” (30 percent), “C” (20 percent) and “D” (10 percent).

Individuals should know what is being measured and how before the measure-

ment period begins. They should also receive regular reports during the period on

progress in relation to the identified target. If these two steps are not performed,

how can one expect to motivate performance? People need to know the basis for

measuring performance, especially as it relates to pay. It is important during the

communication phases to show how individual performance is aligned with the

identified objectives. This is the line of sight alignment. Furthermore, the specific

link between performance and pay needs to be clearly described.

HOW WILL PERFORMANCE BE MEASURED?

Several basic choices determine how performance will be measured. Will it be

financial, nonfinancial or a combination of the two? In addition to performance

within the company, will outside performance factors be considered?

Key Financial Measurements Within the Company

By far, the most common type of performance measurements are financial. They are

easily available from the financial function and are commonly accepted as valid perfor-

mance indicators. They are of two types: relative returns and absolute changes.

Relative Internal Returns. Relative internal returns include a wide variety of

income definitions comparing a specific definition of income to another measure-

ment typically on the balance sheet. The definition may be for one or many years.

The multiyear formula’s advantage is that it is harder to “beat” than a one-year

formula. It is helpful to compare the multiyear return with a single-year result.

If the single-year return is higher than the multiyear result, it indicates the position

improved. Conversely, if the most recent year’s return is lower than the multiyear

return, it indicates the performance deteriorated. Several of the most common

return formulas include:

❚ Return on assets (ROA). This is net income divided by total assets. This formula

is not uncommon with capital-intensive companies and financial institutions as a

measurement of the return on this definition of capital. This percentage excludes

the time value of money because non current assets are carried on the balance

sheet at historical cost less depreciation and amortization.


❚ Return on equity (ROE). This is net income divided by total shareholder equity.

It is appropriate with companies with little or no debt. To the extent assets are

undervalued (see Return on investment), shareholder equity will be comparably

lowered, thereby possibly distorting any ROE measurements.

❚ Return on investment (ROI). This is a generic term to describe any of the “return”

formulas (e.g., ROA, ROCE, ROE and others). It may be somewhat misleading

if a significant portion of “investment” is in undervalued assets (e.g., land and

significantly depreciated assets). In such situations, executives might be reluctant

to invest in needed asset replacements since it would make improvement difficult

because of a larger “investment.”

❚ Return on net assets (RONA). This is net asset, divided into operating income.

Like ROA, it is typically used for capital-intensive organizations. It is frequently

used at the strategic business-unit level, where no shareholder equity exists.

❚ Return on sales (ROS). This is net income divided by net sales (e.g., sales

minus freight and returns). This is frequently used by manufacturing and service-

sector companies.

Absolute Internal Changes. These changes measure absolute changes in different

definitions of “income.” Like the relative internal returns, the measure could be for a

stated number of years, but more typically is an annual measurement, which in turn

can be compared with either an earlier year or a targeted value. Several common

absolute change definitions follow:

❚ Earnings before interest and taxes (EBIT). Also called operating income; many

argue that this definition makes the most sense in measuring executives, as it

includes all expenses other than income taxes (over which executives have no

control) and interest charges (over which they may have some control).

❚ Earnings before interest, taxes, depreciation and amortization (EBITDA). This is

gross margin less operating expenses or, stated another way, it is EBIT (operating

income) with depreciation and amortization added back in. EBITDA is not usually

found as a line item in many company annual reports, but it may be useful

in incentive plans if the board of directors believe management should not be

held accountable for interest charges, income taxes, depreciation of buildings and

equipment, as well as, amortization of goodwill. However, many believe execu-

tives should be held accountable for achieving an income in excess of borrowing

and acquisitions decisions, and therefore, it would be more logical to use EBIT

than EBITDA.

❚ Economic profit (EP). This is what remains after the cost of capital is subtracted

from net operating profit after taxes (NOPAT). The cost of capital is the interest paid

on debt plus a return to the shareholders. The latter may be defined as dividends

paid or an expected return such as the risk-free rate of return on a government

debt obligation plus a risk premium (6 percent, for example). Alternatively, a cost

of capital could be determined by identifying the current short- and long-term

borrowing rates and what the investors look to receive beyond a risk-free rate


of return. Assume, for illustration, this is 10 percent. This might be multiplied by

capital consisting of net current currents. In other words, current assets minus

current liabilities. Because of the equity element, this measurement is most likely

to be found only on the corporate level.

❚ Gross margin. This is income after subtracting the direct costs of goods sold

from net sales. This definition is often used for subdivisions of an organization

(e.g., a manufacturing division on site) where other expense deductions do not

apply (e.g., selling expenses).

Because of their composition, some measurements are inappropriate for subunits

of the company, whereas all of those just reviewed could be used at the corporate

and subunit levels. In selecting the ones to be used, make a determination of

whether to use the same definition on a companywide plan, as well. For example,

if operating income is used for a division plan, and the division head will be paid

partly on company and partly on division performance, should the company plan

also include operating income, or perhaps EBIT or EBITDA?

While financial measurements are commonly used in short-term and long-term

incentive plans, do they really reflect the way an organization measures its perfor-

mance? They account for financial stewardship, but do they measure value added?

Furthermore, they are backward-looking, not forward-focused, and therefore do

not highlight important changes until after the fact. For these reasons, exclusive

use of financial measurements is probably inappropriate. Nonfinancial performance

measurements, although more difficult to quantify than financial measurements,

may be more appropriate in indicating how an organization is truly performing.

However, such measurements lack the Generally Accepted Accounting Principles

(GAAP)-prescribed definition of consistency of financial measurements.

Other Key Measurements Within the Company. There are other financial

measurements available; however, they exclude a host of other items that could, and

maybe should, be measured. Financial measurements do not include all factors that

management examines when running the company. These factors include nonfinan-

cial assets and processes leading to the creation of value and execution of strategy.

Often these are grouped in a category called goal sharing since eligible persons

share credit for the extent to which the goal has been achieved. When including

nonfinancial measurements, it is important that each be clearly defined in terms of

output and time. The objective must be important to the organization, and it must

be attainable. Some possibilities are:

❚ Culture. The embodiment of values and beliefs of the workforce on how work is

to be done. This is especially important when companies are attempting to change

their culture. Attitude surveys and behavioral tests are typical measurements.

❚ Intellectual capital. It has been often cited that an organization’s workforce is its

only sustainable competitive advantage. The collective and interactive skills of an

organization’s workforce (and contractors) at all company levels are the major factor

in determining its creativity, productivity and customer satisfaction. The first two are


obvious, the last less so. But empirical evidence suggests that customers are most

likely to be satisfied with a company if the employees (with whom they interact)

are also satisfied; the reverse is also true. Dissatisfied employees often result in

dissatisfied customers. Therefore, employee work should be evaluated in terms of

what they know, what they do and how they do it. The first is knowledge-based,

the second is output-based and the third is value-based.

❚ Intellectual property. How strong are the company’s copyrights and patents?

When do they expire? What is the likely impact on company revenue and earnings?

❚ Organizational objectives. This covers a wide range of possibilities, from business

strategies (the “what”) to culture (the “how”). Business strategies might include

organizational restructuring (acquisitions, divestitures, mergers, alliances and/or

joint ventures) and planning issues (environmental compliance, product port-

folio, technology transfers, executive succession and workforce diversity). Culture

defines how work is done and how people are treated. Ethical behavior is only

the first rung in developing a high-performance workplace.

❚ Product/service innovation. New product development can be examined at the

corporate and divisional levels. Some measure the cost of research and develop-

ment in relation to sales. This is an input model and does little in measuring the

effectiveness of the other expenditures. Some measure the market potential of new

products in the pipeline. This is a market-share model. Others will measure R&D

costs covering a period of time in relation to new sales (namely, the product of the

expenditure). This is an output-cost model. Some measure the time from discovery

(or development) until the product is marketed; namely, how long does it take to

bring a product to market? This is a process or calendar model. Others measure the

prevalence of new products as a percentage of total sales (e.g., 20 percent of total

sales came from products not sold the previous year, or 80 percent of total sales came

from products not sold five years ago). This is a revenue output model. One would

expect the percentage to increase with an increase in the time period measured.

❚ Productivity. If output is defined as volume times cost, then productivity increases

can come from increasing volume with no increases in cost, decreases in cost with

no decrease in volume or increases in volume and decreases in cost. Productivity

can be measured at all organizational levels. Operating income divided by total

employees in the unit might be a productivity indicator.

❚ Quality. This is defined in terms of nearness to perfection at any level of the

company. Some have chosen the six-sigma standard, in other words, 99.99966

percent perfect (stated another way, only 3.4 imperfect products for every one

million produced). The quality standard selected should be consistent with the

requirement, especially if the product is delivered at higher cost; otherwise, the

lower-cost product would be the obvious choice of the buyer.

❚ Quantity. This is volume, or the number of units produced or sold at any level of

the company. It excludes cost and price. It is useful in netting out price changes

in measuring productivity.


Combination of Financial and Other Key Measurements. It is more difficult to

motivate individuals with multifactor performance measurements than with a single

measuring stick. This difficulty stems from the fact that it requires the person to focus

on more than one item, some of which, at least on the surface, may appear to be

contradictory. Nonetheless, multimeasurement systems add balance to the process.

It would be reasonable to have a measurement combining innovation, productivity,

customer satisfaction, employee commitment and financial results. Designing the most

appropriate mix must be company-specific. It is also likely that the measurements will

change periodically. Minimally, they should be reviewed annually to ensure they are

still focusing on the key components.

A great example of the combination plan is the “balanced scorecard,” developed by

Robert Kaplan and David Norton. It identifies four areas of measurement: customer

(acquisition, retention and satisfaction); financial (internal and external measurements);

internal processes (linking financial and customer measures through productivity and

innovation); and learning growth (identifying the gap between current and what is

needed on the other three measurements).

The balanced scorecard is not simply a measurement process, it is a system rein-

forcing management objectives. It is a process that can be applied from top to bottom

in an organization.

Financial Measurements Outside the Company. There are three types: performance

of other companies, ratings by outside organizations and general economic factors.

1 | Performance of other companies. These measurements are typically relative to

own company performance and could use any measurement identified as internal

to the company. The purpose is to show how well the company is doing relative

to others. An excellent example of this is the stock chart included in the company

proxy statement for publicly traded companies. It could be a company-defined

group of companies, an industry subset within the appropriate stock exchange,

or the composite performance of the entire stock exchange. Such measurements

are for shareholder value. However, some companies have designed annual and

long-term incentive plan payouts in relation to how well the company performed

against a defined peer group of companies on such factors as earnings per share,

economic profit and return on sales, to mention a few. Valid peer comparisons

are difficult to do because no two companies are alike; however, the objective is

to view the comparison from the eyes of an investor trying to decide in which

company (in a particular sector) to make an investment.

2 | Ratings by outside organizations. The Corporate Library, Institutional Shareholder

Services, Moody’s and Standard & Poor’s head the list of organizations doing their

own analyses of the health of companies. Companies want the highest possible

rating, as this enables them to get the most favorable treatment on bond issues

and secondary stock offerings.

3 | General economic factors. Own company performance could be adjusted in light of

changes in economic factors. Two key measurements would be the cost of capital


and corporate income taxes. One could

argue that it is misleading to compare

historical performance or even the cost

of capital or corporate-taxes charge

against budgeted expectations when

either of these factors is changed.

More specifically, one would expect

better financial performance if interest

rates and/or corporate income taxes

decline. Conversely, one would expect

poorer performance if the reverse

were true. However, some planners

attempt to avoid such comparison

difficulties by using measurements

excluding their impact. For example,

EBIT (earnings before interest and

taxes) excludes both, while both are

included in net earnings.

Other Key Measurements Outside

the Company. These include customer

satisfaction, customer retention, environmental compliance and management

cost ratios.

❚ Customer satisfaction. Measured by surveys and/or focus groups, this is an indica-

tion of future sales potential companywide and/or by division. Satisfied customers

will buy again; dissatisfied customers will not. Both will tell others, so their expe-

riences also affect future sales. Items measured are quality of product/service in

relation to price. Such surveys may also include delivery of undamaged goods,

goods when promised, back-up warranty with fast repair, and fast response to

information requests and complaints. When measuring the customer-satisfaction

levels with a company’s own products/services, it is important to put this assess-

ment in terms of customer needs and expectations. Why do the customers who

like us value our products/services? What one thing do we do best? What one

thing is our greatest opportunity for improvement? Of those who do not value

our products/services, what three things must we address to gain their approval?

And who are the major competitors, and how do they measure up?

❚ Customer retention. This is a measurement of the percentage of customers who

return to buy again. What percentage of first-time customers come back? What

percentage keeps coming back? The shorter the interval between their return and the

longer the period of continually coming back, the more impressive the indicator.

❚ Environmental compliance. This is a measurement of how well the company is

performing in terms of air and water pollution and complying with regulatory

requirements. What is the likely financial exposure of noncompliance?

RESOURCES PLUS


www.worldatwork.org

Type in this search phrase on the search line:

❚ “Pay for Performance.”


❚ Designing Management Incentive Plans:

How-to Series for the HR Professional

❚ The Best of Performance Management:

A Collection of Articles from WorldatWork

❚ Incentive Pay: Creating a Competitive Advantage

❚ Linking Pay to Performance: How-to Series

for the HR Professional.



❚ C11: Performance Management—

Strategy, Design and Implementation


and Bonuses.


❚ Management cost ratio. The ratio of CEO pay to a stated financial measurement

(e.g. earnings, market capitalization or sales) can be compared to ratios of

comparator companies. The lower the ratio, the more expensive the cost of

management. The same calculation can be made for the combined pay of the

five proxy-named executives. A high ratio of CEO pay to the next highest paid

in the company worries many that a team approach is missing. Ratios should not

only be measured and compared with peer companies but viewed longitudely

to determine if they are improving or deteriorating. Where does one company

stand in the pecking order? Is a change warranted?

Combination of Financial and Nonfinancial Measurements

Comparing a company’s own financial performance with that of others on earnings

per share and stock price could, for example, be combined with measurements of

customer retention and satisfaction.

Combination of Internal and External Measurements

To determine the most appropriate measurements, consider the industry, stage

of the market cycle, strategy focus and organization structure. The industry will

suggest factors on the income statement and balance sheet that are most significant

and the importance of the cash flow statement. Comments on these were made

earlier when reviewing the various financial measurements. As for market cycle

stage, as shown in Figure 2, there is almost a reciprocal relationship between

sales and earnings. At the threshold stage, revenue is key as the company looks

to establish market position. Profits may be nonexistent because of development

and marketing costs. In the growth stage, market penetration to increase market

share is still key, but profits are becoming important. At maturity, revenue has

slowed and profits are high in importance. And in decline, revenue is decreasing

but opportunities still exist.

Strategy focus aligns the shareholder with its measurables: community environ-

mental compliance; customer satisfaction and customer retention; employee-attitude

surveys; undesirable separations; charges of discriminatory treatment; improvements

in the workforce’s core-competence knowledge; and shareholder ROI.

Organizational structure affects not only the level where the measurement is

made but also, given the definition of measurements available, the type most likely

used. A centralized organization is likely to emphasize corporate measurements;

FIGURE 2 Market Stage versus Revenue and Profit Importance

Category Threshold Growth Maturity Decline

Revenue (sales) High High Moderate Low

Profits (earnings) Low Moderate High High


a decentralized organization is more likely to emphasize measurements at lower

levels in the organization. To the extent the latter have no shareholder equity or

decisions on taxes and debt, the financial formulas available are even more limited.

Nonetheless, possibilities were identified earlier in this paper.

The industry, market stage, strategy focus and organization structure measure-

ments identified can be measured for the company itself as well as in relation to

identified peer companies. In other words, the internal performance (financial and

nonfinancial) is assessed and the results compared with external measurements to

see how well the company is doing versus others and in light of major economic

factors affecting profitability.

Characteristics of Valid Measurements. In selecting what measures to include when

designing the pay program, many considerations exist, including the following:

❚ Are the factors being measured the most important ones?

❚ Are the definitions clear, enabling a valid and reliable measurement?

❚ While difficult, are the targets (and even the maximums) attainable?

❚ Are the factors being measured and the measurements understandable to those

being rated?

❚ Is the degree of difficulty comparable across the organization for similar posi-

tions/jobs?

❚ To what extent are individuals able to achieve the stated performance based on

their own efforts? And for group plans, to what extent are the individuals able to

at least significantly affect the results?

❚ Will individuals be able to receive regular feedback on progress?

❚ Are the raters objective and not subject to bias?

❚ Has the plan been successfully tested?

❚ Will the measurements place the company in a cost-effective position with other

comparable companies?

SUMMARY AND CONCLUSIONS

In designing a pay-for-performance plan, the first and a most important step is to

determine what performance will be measured. Will it be financial, nonfinancial or

a combination of the two? Will it be based on individual, group performance or a

combination of the two? Will there be a hurdle (minimum level) before payment will

be made? Will there be a target? Will the performance relative to other companies

in one’s peer group be assessed? These are all-important issues to be examined

because empirical evidence suggests that what gets measured gets attention.

The attention is even greater if it is the basis for earning money.

An additional question needing attention is: Will the same measurement(s) be

used for salary and short-term and long-term incentives? Typically, the answer is

“no.” Individual performance usually is the sole basis for salary actions, while the

basis for short-term incentives is often combined with group (up to and including

companywide) performance, and only group performance is the basis for long-term


incentive payouts. For example, a salary increase might be for satisfactorily doing

the routine, day-to-day work, whereas the short-term incentive might be based

on several specific individual objectives as well as the extent to which a group

objective was achieved (e.g., economic profit). The long-term incentive might be

tied to earnings per share and shareholder value increase versus a defined peer

group of companies. A key factor is avoiding paying more than once for a particular

measurement for a prescribed time period.

Since short- and long-term incentives are the best vehicles for pay for performance,

it is critical that the performance factors be carefully identified and defined. Problems

in recent years with companies engaging in off-balance-sheet transactions and

revenue recognition changes to improve their financial position suggest that the

rewards should be significant but not enormous. The more emphasis companies

place on plans that reward handsomely for financial performance, the more careful

they should be in ensuring legally and morally defensible numbers. ❚

Bruce Ellig is the noted author of more than 90 articles and seven books including his most recent, the updated

and revised edition of The Complete Guide to Executive Compensation. Much of the material in this paper has

been taken from this book. Ellig served as worldwide head of HR for Pfizer Inc. for the last 11 years of his 35

years with the company. He is a member of the National Academy of Human Resources and the recipient of

many lifetime achievement awards including those from SHRM and WorldatWork, where he was awarded the

2004 Keystone Award.

AUTHOR

It is well-established that compensation is not the only

factor in determining whether a job candidate will

select a company or an employee will remain with

an employer. The New York Times recently published

a piece indicating that benefits topped employees’

considerations in deciding whether to stay at a company

(Brown 2007).

And, of course, the WorldatWork Total Rewards Model

(Figure 1) presents an overview of everything an employee

could perceive to be of value resulting from the employ-

ment relationship.

In the last decade, due to its rapidly increasing cost, the

benefit of health insurance has been getting much atten-

tion. The extent of employers’ ability to offer attractive

health-insurance plans became limited. To lower the cost

of health plans, on Jan. 1, 2004 the federal government

created health saving accounts (HSAs) (National Center for

Policy Analysis 2004). HSAs make health care less costly

by using a “tax-favored savings account” in combination

with a “high-deductible health plan” (HDHP) (eHealthIn-

surance Services Inc. 2008). This enables employees to

pay for qualified medical expenses using pretax money.

Considerably lower premiums for the HDHPs allow compa-

nies and workers to save health-insurance dollars.

Health Savings Accounts: Their

Purpose in a Company Setting

Zuzana M. Micko

University of Minnesota

❚ Benefits

Second Quarter 2008




FIGURE 1 The Total Rewards Model (WorldatWork 2008a)

©2007 WorldatWork

The HSA concept is different from other concepts used in the American health-

insurance industry. This difference means that it is not an easy switch for employers

from health-insurance plans with no deductibles or low deductibles to HDHPs.

To alleviate or eliminate possible employee resistance, providing extensive employee

education, communication and training is crucial.

This paper explains the history of HSAs as well as the basic characteristics of

these plans. It also examines the challenges companies face as they introduce these

plans to their workers.

HSA HISTORY

The originator of the model of health savings accounts was the chief economist of

the American Medical Association, Jesse Hixson. He introduced this concept to the

President of the National Center for Policy Analysis (NCPA), John Goodman, and

to Senior Fellow Gerald Musgrave. Later, Goodman became the spokesman for this

idea, and shortly after, he earned the title of the “Father of HSAs” (National Center

for Policy Analysis 2004).

According to the National Center for Policy Analysis (NCPA) (2004), the first HSA

attempts date back to 1984, when the plan was to tackle “the long-term problem

of Medicare” by “individually owned ‘medical IRAs’.” In 1990, medical savings

accounts (MSAs), the prelude to health savings accounts, were introduced. This

model was based on buying HDHPs and allocating dollars saved on premiums

in a “personal health account” for later use for “small medical expenses.” At first,

MSAs had major tax disadvantages. The unspent money could not roll over at

year’s end to grow and earn tax-free interest, and the “deposits were subject to

income and payroll taxes.” This was changed in 1996 when small businesses and

self-employed individuals could have tax-free MSAs.


Health reimbursement accounts (HRAs) represented the next preface to health

savings accounts. Again, according to the 2004 NCPA report, HRAs were significant

in strengthening “employer support for consumer-directed health care.” These health

plans were more popular among large employers. Employers fund these plans and

since June 2002 the plans can be rolled from one year to another on a tax-free

basis. However, they are not portable, which means that if employee positions are

terminated, employees cannot take HRAs with them, and they are (more or less)

“expense accounts with use-it-or-lose-it incentives.”

HSAs became effective on Jan. 1, 2004. Since then, Americans had the advantage

to manage their health-care money by participating in these plans (eHealthInsurance

Services Inc. 2008).

In 2008, according to Watson Wyatt, 27 percent of companies offer CDHPs with

a health savings account, while 24 percent offer a health reimbursement account.

Employers are three times more likely to add an HSA in 2009 (9 percent of the

survey) than an HRA (3 percent of those surveyed) (WorldatWork 2008b).

HSAS MORE IN DEPTH

Breaking the topic of HSAs into the following sections is best approached

for discussion:

❚ What is an HSA?

❚ Who and how much can fund HSAs?

❚ Which high-deductible health plans are HSA eligible?

❚ How can employees access their HSA dollars?

❚ What is most important that employers need to remember in the process of

implementing HSAs?

What is an HSA?

One main characteristic of a health savings account is that it represents “a system

that is responsive primarily to individual consumers, rather than to third-party

payers” (HSA For America 2008a). This theory is called consumer-driven health

care, or CDHC. An HSA “is a tax-favored savings account” used in combination

“with a qualifying HDHP” (HSA For America 2008b). In other words, it is a savings

account that lets employees save tax-free dollars for health care. Two important

points are of note. First, the health savings account is separate from the high-

deductible health plan, which provides the health insurance. Insurance carriers sell

HDHPs. The health savings account, independent from the HDHP, is administered

by account administrators, some of whom are banks. Second point: an HDHP

can exist without an HSA, however, a health savings account cannot be set up

unless it is accompanied by an eligible HDHP (eHealthInsurance Services Inc. 2008).

Unlike flexible spending accounts, HSAs do not have a use-it-or-lose-it incentive.

This means that unused money in employees’ HSAs at the end of the year rolls

into next year. HSAs are also portable. Employees own their HSAs and, in the


event of job termination, employees keep their HSAs with current balances.

Also, the account owner can pass the HSA to his/her successors (eHealthInsur-

ance Services Inc. 2008). Money in the HSA can be used tax-free to pay for

any eligible health-care expenses. Eligible expenses are those listed in Internal

Revenue Code Section 213 (d). HDHPs typically come with a plan summary

listing qualified and nonqualified medical expenses under the particular plan.

A guideline to remember with qualified and nonqualified expenses is that the cost

of any medically necessary service, device and/or medication falls under qualified

expenses. Some examples of such expenses are chiropractor services, crutches,

nursing and medical services, etc. (HSA Bank 2008). HSA noneligible expenses

are those that are medically unnecessary (for example, some surgery to approve

one’s appearance). In spite of the distinction between qualified and nonqualified

expenses, employees are free to use their HSA funds for any medical expense

deemed needed by the user. However, if these dollars are used for nonmedical

purposes and prior to the age of 65, employees must pay an income tax and a

10-percent penalty. After the age of 65, only income tax applies.

Early in 2008, Wolters Kluwer Financial Services reported:

A majority of the nearly 1,200 financial institutions responding to a recent

Wolters Kluwer Financial Services survey say they are offering their customers

Health Savings Accounts (HSAs) and that the top reason they are doing so is

customer demand.

Sixty-two percent of the survey’s respondents, a majority of which were commu-

nity banks and credit unions, said they are offering HSAs while more than one

in three of the respondents who said they are not currently offering HSAs are

planning to start in the next three months.

The number one reason institutions offering HSAs said they were doing so in

the survey was customer demand (80 percent), followed by the ability HSAs give

them to generate new accounts (58 percent), increase cross-sell opportunities

(51 percent) and increase deposits (51 percent).

While HSAs are growing in popularity, it is clear customers are still in the early

stages of adoption as the number one reason institutions not offering HSAs

surveyed was also customer demand at 74 percent. And the majority of institu-

tions offering HSAs responding to the survey reported a small number of accounts.

Sixty-nine percent of respondents reported 100 or less HSA accounts, 18 percent

reported 101 to 500 accounts and seven percent listed more than 500.


Who and How Much Can Fund HSAs?

Employers and employees can put money into employees’ HSAs. At the same time,

neither party is required to make any contributions to these accounts. However,

contributions are highly recommended so that employees have the means to cover

possibly arising health-care expenses. To become more attractive to the public,

HSAs have been undergoing many legislative changes. One legislative modifica-

tion removed the rule of prorated contribution limits to health savings accounts

based on the month of the year employees enroll in the plan. Removing this rule

allows employees, who enroll for HSAs and enroll in an HDHP during the year, to

contribute to their HSA up to the same total of dollars as if they were enrolled for

an entire year. If they change their HDHP before an entire year passes, payments

toward their HSAs “become taxable in the year participation in the HDHP ends

and a 10-percent penalty applies as well” (Milliman Inc. 2008). The maximum

allowed yearly contribution, between the employer and the employee, is subject

to annual change reflecting the inflation rate (Milliman Inc. 2008).

In 2008, the amount of this contribution is “$2,900 for single coverage and

$5,800 for family coverage, regardless of the HDHP’s deductible” (eHealthInsurance

Services Inc. 2008).

According to the HSA Resource Center (2008), individuals of ages between 55

and 65 are allowed a “catch up” contribution, $900 in 2008, on top of the regular

maximum yearly contribution. As previously explained, any unused dollars in health

savings accounts at year’s end roll into the next year. The amount of this rollover

does not count toward the maximum allowable annual contribution. This enables

employees to save more tax-free dollars than solely the allowed yearly sum. HSA

dollars earn interest on a tax-deferred basis and workers have the option to invest

this money as well.

Among recent legislative changes in the HSA area is a ruling regarding the roll-

over of funds from flexible spending accounts (FSAs) and HRAs to HSAs. When

employees enroll in an HDHP, they are allowed a one-time rollover from FSAs

and HRAs to HSAs without the rolled-over funds counting against the highest

annual allowed contribution to HSAs (Milliman 2008). Beginning the day an HSA

is enacted and prior to Jan. 1, 2012, employees could relocate “the lesser of: the

amount in the account on Sept. 21, 2006, or the amount remaining on the date of

the rollover” (Wellpoint Inc. 2008). For example, if an employee had $2,000 in his/

her FSA on Sept. 21, 2006, this person enrolled in an HDHP on Jan. 1, 2007, and

the amount in the account on Dec. 31, 2007. is $2,500, he/she could rollover only

$2,000. According to Milliman (2008), employees can also do a one-time rollover

from their IRAs to their HSAs.

Which High-Deductible Health Plans are HSA-Eligible?

For a health-insurance plan to be HSA-eligible, it must have a certain minimum

yearly deductible and a certain maximum yearly out-of-pocket. These amounts are


subject to annual change, and in 2008, the minimum deductible is $1,100 for indi-

vidual coverage and $2,200 for family coverage (HSA For America 2008a). This year,

2008, the maximum out-of-pocket expenditure for eligible costs cannot be more than

“$5,600 for self-only coverage” and “$11,200 for family coverage” (HSA For America

2008). To avoid a common misconception, it is important to reiterate that HDHPs

are not the same as HSAs. However, for one to be able to open an HSA, one must

be enrolled in an HDHP.

How Can Employees Access Their HSA Dollars?

Employers decide which HSA administrator’s services they will use. Most companies

consult their employee-benefits brokers before they make this decision. Administrators

of health savings accounts continually improve with new services to make HSAs user-

friendly as possible. The newest innovation makes accessibility of HSA dollars easier

by providing customers, in this case employees, with debit cards and/or checkbooks.

When workers must pay for medical services, devices and/or for medicine, they use

their cards or checkbooks. This process is identical to the one of purchasing any other

good or service. Employees also receive a periodic statement in the mail from their

HSA administrator. This statement looks similar to a bank statement and summarizes

the HSA’s activity and balance. So, accessing HSA funds and keeping track of them

is as easy as accessing and tracking a regular bank account.

What is Most Important that Employers Need to Remember in the Process

of Implementing HSAs?

Employee education tops the list of issues for total rewards professionals to consider

when implementing an HSA program. The premise of health savings accounts is based

on four crucial edifying ideas. The first two are directly related to HSAs; their design

and their workings. The other two are related to the overall behavior of employees

as consumers of health care.

First, employees must understand that the money in their health saving accounts

is theirs at all times. From the author’s experience as an employee-benefits broker

and administrator, often it is difficult for workers to understand the reality of

their ownership of their HSAs. This misunderstanding is based in the fact that

employees are not allowed to use their HSA dollars unless it is for medical expenses.

Establishing this concept is especially tricky when employers help fund employees’

HSAs. In this case, employees tend to not realize that ultimately, what employers

are doing is “giving them money.”

One might think that employees should more easily grasp the idea that they own

their HSAs when a firm does not contribute toward that HSA. However, from the

author’s experience, this is not the case. People frequently struggle with compre-

hending that when they contribute into their HSAs, the contributed dollars remain

in their possession, except that a purpose has been assigned to those funds.


The second point of education

involves helping workers compre-

hend that when they open HSAs,

they are responsible for all medical

expenses, with the exception of

preventive care, up until they fulfill

the amount of their HDHP’s deduct-

ible. Further, depending on type of

the particular HDHP, the employee

carries responsibility for a portion of

or for all medical expenses up until

they meet their annual out-of-pocket.

Out-of-pocket amounts of HDHPs are

substantially higher than the ones of

low-deductible health plans. Many

employees have been accustomed to

these low-deductible plans. Currently,

there are various designs of HDHPs.

The primary difference among them

is the amount of their deductibles.

Some HDHPs follow the more historical low-deductible plan principle, where the

deductible is considerably lower than the out-of-pocket. Workers are 100 percent

responsible for all expenses up until the total deductible is reached. Once that

deductible is fulfilled, employees are still responsible for covering a portion (typi-

cally 10 percent or 20 percent) of the medical claims up to the amount of the yearly

out-of-pocket (HSA Bank 2008). When the insured party reaches this sum, he/she

is covered at 100 percent for the remainder of the year. Next year, the same cycle

repeats. The other HDHP design is one with an out-of-pocket equal to the deduct-

ible. Employees who have these types of HDHPs are responsible for covering all

health-care services, devices and/or medications up to the yearly total of deduct-

ible/out-of-pocket. Once they fulfill this sum, they are 100 percent covered for the

remainder of the year. Next year, the cycle repeats. The question of “Which HDHP

design should the company offer to its employees?” depends on costs, organiza-

tional culture, workers’ mindset and the company’s economic situation.

Third, total rewards professionals need to help employees understand that the

cost of their health insurance is negatively related to their health. If the employee

population is in poor health, the health-insurance cost is usually high. The opposite

is also true. So some HSA believers are confident that prevention is a key to lowering

the cost of health insurance. Therefore, most HDHPs cover preventive care at 100

percent to encourage ongoing disease prevention.

The final point involves teaching employees to be smarter consumers of health

care. The author’s experience indicates that people struggle with perceiving medical

RESOURCES PLUS


www.worldatwork.org

Type in any or all of the following search keywords on

the search line:

❚ HSA

❚ “Health Savings Accounts”

❚ Healthcare

❚ Benefits.


❚ The Employee’s Guide to Becoming

a Smart Benefits Shopper, Second Edition

❚ Managing Employee Health Care Costs:

A Collection of Articles from WorldatWork.


❚ B3: Health Care and Insurance Plans—

Design and Management

❚ B3A: Health Care and Insurance Plans—

Financial Management.


services, devices and medication as any other good or service they purchase on

a daily basis. Most individuals shop to find the same quality at a lower cost for

clothing, food, vehicles, oil change, etc. However, they fail to do the same when it

comes to health care.

On the other hand, participants enrolled in HSAs are more likely to plan and

save for health-care coverage, according to a Blue Cross and Blue Shield Association

(BCBSA) survey. The “BCBSA 2007 CDHP Member Experience Survey” found that

consumers eligible for health savings accounts (HSAs) were 17 percent more likely

to participate in an exercise program than those enrolled in non-CDHP prod-

ucts. These consumers were also more likely to engage in the following wellness

programs: smoking cessation (20 percent versus 6 percent), stress management

(22 percent versus 8 percent), and nutrition and diet programs (27 percent versus

12 percent). Furthermore, HSA-eligible consumers participating in these programs

were more likely to see positive results. Additionally, the survey found 63 percent

of consumers eligible for an HSA, tracked their health-care expenses and 47 percent

are currently saving for future health expenses. In contrast, only 43 percent of

non-CDHP consumers track health-care expenses while 18 percent save for their

future health-care expenditures. HSA-eligible consumers also are more likely to seek

information about insurance as well as about provider (doctor and hospital) costs

and quality (Blue Cross and Blue Shield Association 2007).

Communication is the key to educating the consumers. And more companies in

the U.S. in 2007 were implementing internal communication programs, especially

those that aim to increase employee participation in benefits programs.

Watson Wyatt’s 2007/2008 Communication ROI study found that 53 percent of

employers used communication vehicles such as printed materials, special mailing

and employee meetings to increase enrollment in benefits programs in 2007.

This has more than doubled during the past four years from 25 percent in 2003

(WorldatWork 2008c). ❚

Zuzana M. Micko graduated from the University of Saint Thomas, St. Paul, Minn., with a degree in Spanish. She gained

her experience in employee benefits as an employee benefits broker, and later as an HR assistant. She is scheduled

to graduate with a master of arts in human resources and industrial relations degree from the Carlson School of

Management at the University of Minnesota in May 2008. Upon graduation, she will join Target as a participant in

the company’s Human Resources Leadership Program.

AUTHOR


Blue Cross and Blue Shield Association. 2007. “Blue Cross And Blue Shield Association Survey Shows Consumer

Driven Health Plan Enrollees Are Taking More Control Of Their Healthcare.” http://www.bcbs.com/news/bcbsa/

blue-cross-and-blue-shield-12.html?templateName=template-28767547&print=t. Viewed: March 20, 2008.

Brown, Paul B. 2008. “Same Office, Different Planets.” The New York Times, Jan. 26: 35.

eHealthInsurance Services Inc. 2008. https://www.ehealthinsurance.com/ehi/Alliance?allid=Goo18312&type=

HSA&sid=HSA+1+032306. Viewed: March 24.

HSA Bank. 2008. http://www.hsabank.com/HSAInfo/StaticContent.aspx?contentID=76. Viewed: March 24.

HSA for America. 2008a. http://www.health—savings—accounts.com/faq.htm. Viewed: March 24.

HSA for America. 2008b. http://www.health—savings—accounts.com/ Viewed: March 24. HSA Resource Center.

2008. http://www.hsaresourcecenter.com/contributions/catchup.php. Viewed: March 24.

Milliman. 2008. www.milliman.com. Viewed: March 24.

National Center for Policy Analysis. 2004. http://www.ncpa.org/pub/ba/ba481/. Viewed: March 24, 2008.

WellPoint Inc. 2008. http://www.anthem.com/shared/noapplication/f0/s0/t0/pw_ad086422.doc.Viewed: March 24.

WorldatWork. 2008a. “What is total rewards?” http://www.worldatwork.org/waw/aboutus/html/aboutus-whatis.

html. Viewed: March 21.

WorldatWork. 2008b. “More Companies, Workers Adopt Consumer-Directed Health Plans.” Newsline: March 13,

2008. Viewed: March 20.

WorldatWork. 2008c. “Employers Saying More about Benefits.” Newsline: Feb. 14, 2008. Viewed: March 20.

Wolters Kluwer Financial Services. 2008. “Health Savings Account Survey Results.” Jan. 24, 2008.

http://www.wolterskluwerfs.com/Info/HSA/HSA_Survey.pdf. Viewed: March 20.

REFERENCES

Published Research in Total RewardsA review of total rewards, compensation, benefits and HR-management research reports.

(Compiled by the editors from the WorldatWork Newsline column on www.worldatwork.org.)

CEO Bonuses Down, 10b5-1 Stock Trading Plan Use Up

In a study of 178 companies with annual revenues of more than $1 billion, the median value of CEO

bonuses tied to annual performance plans covering 2007 fell by 18.6 percent. The prevalence of

such payouts fell from 77.5 percent in 2006 to 70.4 percent in 2007. However, overall CEO bonus

compensation in fiscal 2007 grew by 1.4 percent during 2006. Overall bonuses include discretionary

awards and cash payouts from annual and multi-year performance plans. While the prevalence of

CEO discretionary bonuses increased slightly from 24.2 percent in 2006 to 26.8 percent in 2007,

the median value of discretionary awards grew by 27.6 percent. (www.equilar.com)

Worldwide Gender Gap is Stuck at 16 Percent

A report reveals that, on average, women around the world are paid 16 percent less than their male

work colleagues. The International Trade Union Confederation report, “The Global Gender Pay Gap,”

includes detailed analysis of statistics from official sources in 63 countries worldwide. Data from an

online salary survey covering more than 400,000 workers in 12 countries is also included in the new

study, as reported by Online Recruitment. (www.incomesdata.co.uk)

Departing CEOs Not Receiving Increased Termination Payments

At Most Companies

The vast majority of U.S. companies paid CEOs who departed in 2007 the same compensation

disclosed in their 2007 proxy disclosures and provided no additional ad hoc termination payments,

according to a survey. The Watson Wyatt Worldwide analysis compared 2007 proxy disclosures

with 8-K filings for CEOs departing between April and December 2007. Watson Wyatt found 54 of

70 companies (77 percent) provided no additional compensation at termination to that compensa-

tion disclosed to shareholders in the 2007 proxy. Disclosure of potential termination payments was

required for the first time by the Securities and Exchange Commission (SEC) in 2007 proxy filings.

The remaining 23 percent of companies increased compensation for their CEOs at termination by

a median value of about $600,000. The weighted average of the extra payments, the difference

between 8-K filings and what was reported in the proxy, was 224 percent. In some cases, the

increase included additional quid pro quos such as general release from claims, transition services

provided as a non-CEO, additional noncompete time or an agreement to provide future consulting

services. Smaller companies ($1.4 billion average revenue) were more likely than larger firms to

provide exit pay above what was reported in their proxy. (www.watsonwyatt.com)

Most Multinationals Take Local or Regional Approach to Pay

Although multinational organizations are striving to globalize their compensation practices, less

than one-half have predominantly global programs, according to a recent survey. Mercer’s “Global

Compensation Strategy and Administration Survey” reports 45 percent of participating organizations

take an almost exclusively global approach to compensation design while the majority continue to

take a local approach (39 percent) or regional approach (16 percent). According to Mercer, the devel-

opment of global compensation programs starts with an overall global compensation strategy. While

the vast majority of responding organizations (84 percent) have established a global compensation

strategy for their executive-level employees, much fewer have done the same for other employee

groups, continuing to define their compensation strategies at the local or regional level. Slightly more

than one-half of the organizations (53 percent) have specific global compensation strategies in place

for their managers while slightly less than one-third (30 percent) have global strategies for profes-

sionals and slightly more than one-quarter (26 percent) for sales employees. (www.mercer.com)

Second Quarter 2008




Directors, Institutional Shareholders At Odds Over Whether

Executive Pay Model Is Improving

Corporate directors and institutional investors disagree on whether the U.S. executive pay model

is changing for the better, but both groups feel the current model has hurt Corporate America’s

image. These are the findings from a study by Watson Wyatt Worldwide. “While directors and

institutional shareholders agree on key executive pay issues, they don’t see eye to eye on other

areas,” said Ira Kay, global director of compensation consulting at Watson Wyatt. “While directors

believe the system generally works, institutional investors generally feel the model’s flaws run

deeper and require more substantial changes. Clearly, more work needs to be done.”

(www.watsonwyatt.com/boardandinvestors)

Financial Security Tops List of Gen Y Career Concerns

What career issues keep Generation Y professionals awake at night? When asked to name their

chief career concern, 33 percent of Gen Y workers polled cited compensation and benefits issues.

The second most common response was finding and keeping a job, provided by 26 percent of

those surveyed; career satisfaction ranked third, named by 23 percent of respondents. The survey,

commissioned by Robert Half International and Yahoo HotJobs, examines the professional priorities

of the most senior members of Generation Y, or the “Millennials”—those who have already started

a career or will soon start one. More than 1,000 adults between the ages of 21 and 28 were polled

for the project. The findings are available in a report, “What Millennial Workers Want: How to Attract

and Retain Gen Y Employees.” (www.rhi.com)

Tech Wages Hit Highest Level in Seven Years, but Growth Slows

Hourly wages for highly skilled technology professionals reached an all-time high during the fourth

quarter of 2007. And though growth slowed sequentially at year’s end, it still remained ahead of

2006, according to an index. The “Yoh Index of Technology Wages” reports the average hourly wage

for high-impact technology workers was recorded at $32.39 during October, the highest average

pay figure documented by the index since its inception in 2001. (www.yoh.com/yohindex)

Health-Care Costs Coupled with Small Pay Raises an Issue

With health-insurance premiums growing four times faster than workers’ earnings from 2001 to 2007

(78 percent compared to 19 percent, respectively), workers and employers are paying increasing

attention to health-care costs. A report in the Kaiser Family Foundation’s “Snapshots: Health

Care Costs” series examines changes in wages and benefits since the 1960s, and concludes that

one way working families may be feeling the impact of rising health-care costs is through smaller

increases in their paychecks. (www.kff.org/insurance/snapshot/index.cfm)

Optimism Remains Strong for High-Deductible,

Spending-Account Health Plans

While adoption of high-deductible health plans coupled with spending accounts remains modest,

supporters believe consumer-directed health plans (CDHPs) will take hold as part of a larger employer

strategy to confer more responsibility on workers for health-care costs, lifestyle choices and treat-

ment decisions, according to a new study. National surveys suggest that while CDHPs—typically

a high-deductible health plan accompanied by either a health reimbursement arrangement (HRA)

or health savings account (HSA)—are being offered by a growing number of employers, enrollment

in these products constituted 5 percent of total enrollment in employer-sponsored health plans in

2007. “There’s a lot of window shopping going on with consumer-directed health plans, and there’s

a lot of watchful waiting to see how early adopters fare,” said Paul B. Ginsburg, Ph.D., president of

the Center for Studying Health System Change, a nonpartisan policy research organization funded

in part by the Robert Wood Johnson Foundation (RWJF). (www.hschange.com)


In the Game of Hiring, Flexible Employers Win

Twenty-nine percent of U.S. workers consider work-life balance and flexibility to be the most impor-

tant factor in considering job offers, according to a survey. Compensation still matters, of course,

but it finished second (23 percent) behind lifestyle when workers were asked to name the primary

reason they accepted their current positions. “Money will always be important to people, but in

this age of Internet-powered remote access where there are so many virtual options, employees

place a much higher premium on flexible work arrangements,” said Robert Morgan, co-president of

Recruitment and Talent Management, Hudson, which conducted the survey. (www.hudson.com)

Salary Is Top Draw for Job Candidates, but Benefits Nearly As Popular

A survey suggests that successfully wooing job candidates takes more than salary alone. While 37

percent of chief financial officers (CFOs) interviewed said offering higher compensation than

competitors is the most effective incentive for attracting accounting professionals, nearly as many

(33 percent) felt the benefits package had the greatest influence, up from 2 percent five years ago.

The findings also suggest traditional incentives are a higher priority today: While the popularity of

benefits surged, the number of financial executives who feel telecommuting and flexible work sched-

ules are the top draw fell 20 points, from 33 percent in 2003 to 13 percent in 2008. (www.rhi.com)

U.S. Retirement Assets Grew Substantially in Last 10 Years

Although recent market downturns are holding back asset growth, U.S. retirement plans have nearly

doubled in value since 1997, research reports. Watson Wyatt Worldwide’s 2008 “Global Pensions

Asset Study” found that assets in U.S. pension funds, 401(k)s, individual retirement accounts and

other retirement savings vehicles increased from $7.9 trillion in 1997 to $15 trillion in 2007. As of

the start of the year, these U.S. retirement assets were worth more than the gross domestic product

($14 trillion) based on a compound annual growth rate of 6.7 percent since 1997, compared with

GDP growth of 4.8 percent during the same period. “Retirement plans have built up strong reserves

over the last 10 years, benefiting employers, employees and retirees,” said Carl Hess, director of

Watson Wyatt’s investment consulting in North America. “Companies that have taken steps to

optimize returns or reduce risk through their investment strategies, whether by hedging, diversifi-

cation or better deals on fees, are better positioned than those still thinking about it. The current

market will be challenging for many investors, and we can expect to see declines in asset values

over the next year if the market turmoil continues.” (www.watsonwyatt.com/globalpensionassets)

Small Business Health-Care Survey Points to Need for Reform

While rising health-care costs are an ongoing concern for all businesses, a recent survey confirms

that the small-business community in particular is struggling to maintain health-care coverage for

employees. The survey was conducted of members by the Michigan Business and Professional

Association (MBPA) and its sister association, the Michigan Food and Beverage Association (MFBA).

(www.michbusiness.org)

IRA Plan Assets Concentrated in Families with High Incomes

Assets in individual account retirement plans are concentrated in families with high family income

and higher net worth, as well as in families with older family heads, higher educational attainment,

and white, non-Hispanic family heads, according to a study. These assets were in employment-

based defined contribution plans (typically 401(k) plans), individual retirement accounts (IRAs) and

Keogh plans. The Employee Benefit Research Institute study, in the March 2008 EBRI Notes, reports

individual account retirement plans assets amounted to $6.767 trillion in 2004, according to the

most recent data from the Survey of Consumer Finances. (www.ebri.org)

Facts & FiguresStatistics from this issue of WorldatWork Journal

2,642 Number of Medicare Prescrip -

tion Drug Plans (PDP) offered

in the year 2007 (PAGE 56).

2006 Congress asked the U.S. Govern-

ment Accountability Office (GAO)

to review the effectiveness of Medicare Part D

communication tools (PAGE 59).

70% The Government Accountability

Office’s evaluation of 137 usability

features of the Medicare Part D Web site found

that 70 percent were likely to cause confusion

(PAGE 60).

57% The most frequently mentioned

examples of retention programs

and actions that have been successful with

scarce/critical talent include: Provide child-care

and elder-care benefits, with on-site centers

being the strongest and preferred benefit

(57 percent) (PAGE 19).

Down by More Than 18% | In a study of 178

companies with annual revenues of more than

$1 billion, the median value of CEO bonuses tied

to annual performance plans covering 2007 fell

by 18.6 percent (PAGE 85).

5,462 | U.S. News & World Report (2007)

published a study of performance excellence

of “America’s Best Hospitals” based on 5,462

hospitals (PAGE 17).

35% | In a survey, 35 percent of organizations

said their managers are effective at developing

connections for employee, between their work

and business results (PAGE 32).

Three | Book authors Michael Tracey and Fred

Wireman (1997) formulated a three-strategy

model suggesting organizations compete based

on operational excellence, product leadership or

customer intimacy (PAGE 8).

July 1, 2004 | On July 1, 2004, California imple-

mented the first and only paid family-leave bill

in United States history (PAGE 45).

Expectancy Theory | Research supports expec-

tancy theory, which posits that if an employee

believes that producing outcomes desired by

the organization will result in receiving valued

rewards, the employee will be motivated to work

towards that result (PAGE 11).

Three Types | For financial measurements from

outside a company, there are three types of

measurements: performance of other companies,

ratings by outside organizations and general

economic factors (PAGE 71).

Two | The question of “Whose Performance?”

breaks into two questions: “Who is included

in being eligible for a pay-for-performance

payment?” and “Whose performance is

measured for that payment?” (PAGE 65).

Two-thirds

For two-thirds of the 21 top-performing medical

centers studied, individual performance is an

objective for determining base-pay increases

and lump-sum payments, if used, for scarce/

critical talent (PAGE 21).

27%

In 2008, according to Watson Wyatt, 27 percent

of companies offer CDHPs with a health savings

account (PAGE 78).

Nearly 1,200

A majority of the nearly 1,200 financial institu-

tions responding to a recent Wolters Kluwer

Financial Services survey said they are offering

their customers health savings accounts (HSAs)

(PAGE 79).

28%

Twenty-eight percent of organizations believe

their managers manage the “pay for perfor-

mance” relationship effectively (PAGE 32).

Second Quarter 2008



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